Technical considerations were the key driver for price action in the EUR/USD cross rate. The usual ‘tricks’ (as there are risk aversion/stock market performance) were not able to do their job yesterday. On Monday, the sell-off in cable was still a good excuse ‘to explain’ at least part of the EUR/USD weakness, but even this factor was less obvious yesterday. EUR/USD started trading in Europe in the 1.3530 area, but the pair failed to take any advantage from a decent open of European stock markets.
Rumours on a Greek rescue plan to be announced anytime soon continued to swirl, but yesterday morning that was of no help for the single currency either. Even worse, a small hesitation (not really a decline) on the stock markets was already enough for EUR/USD to tumble south to retest to 1.3443 low. The level was hit, but once again no follow-through selling occurred. The EMU CPI estimate was the only important eco release on the agenda, but the figure was perfectly in line with expectations and was absolutely no issue for the currency markets. Later in the session, some kind of EUR/USD short-squeeze took place. As was the case for the ‘remarkable’ test of the lows, it would not be correct to link the rebound to the stock market performance.
The pair tested the 1.36 mark early in the US just to drop back to the 1.3520 area. Later in the session, the short-squeeze continued and EUR/USD closed the session at 1.3515, compared to 1.3560 on Monday. The only conclusion we can draw out of the recent price action is that the pair is digesting the recent sell-off/repricing and that EUR/USD traders are eagerly looking for a new story to guide the short-term price action. Has Greece still a role to play for the dayto- day price action in EUR/USD or do we have to look for something else?
Overnight, EUR/USD remained well bid. This move is seen as a further unwinding of EUR/USD shorts ahead of an expected austerity package and/or rescue plan for Greece. Some headlines on the financial news pages that S&P was ‘less pessimistic than financial markets’ might have helped the euro, too.
Today, the calendar contains the final European services PMI and the retail sales. While interesting, they are no market movers. In the US, the ADP labour market report and the ISM non-manufacturing are on the agenda. Both data series are expected to come out close to last month’s reading. Recently, eco data had only a rather limited impact on EUR/USD trading. On top of that, the market focus today will once again be on Greece. The Greek government is expected to publish a new austerity package. First question is whether this plan will be sufficient and credible for markets. Next question is whether it will be the trigger for Europe to make a ‘hard’ commitment to support Greece. Recently, making bets on the details and on the timing of a Greek rescue plan was rather risky business.
In a day-to-day perspective, any decision on Greece might cause a further repositioning on the recent ‘euro short’ market trend. Of course, some of the unwinding had already been done over the last 24 hours. In a long-term perspective, the need for a recue package can been considered as a failure of the European institutional framework to prevent this kind of issues. So, one might raise the question whether a rescue package as such should be a lasting support for the euro.
To be honest, we don’t expect it to be the trigger for a sustained euro rebound. As we already indicated over the previous days, EUR/USD traders have reached a point where they are looking for a new trading theme. In such a context we keep a close eye on the technical charts. For new we hold on to our view that a sustained EUR/USD rebound beyond the 1.3850 resistance area won’t be that easy (cf infra), but keep an open mind the see how a potential new trading theme (if it would be found) will affect trading.
Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were good reasons for investors to hold back on safe haven dollar long positions. However, at the end of last year, there was growing evidence that the US economy was gaining traction and this fuelled market speculation that the era of close-to-zero US interest rates might not last till eternity. This triggered a USD short-covering move. Euro negative headlines (Greece) reinforced the EUR/USD correction. From that point, we were looking for clues whether the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-distant future.
So, we installed a cyclically inspired sell-on-upticks approach in EUR/USD. Since mid January, the Greek saga (and other intra-EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. So, we couldn’t ignore the strong technical signal of the break below the 1.4220 level, even as it was due to outright euro weakness. Recently several US data series and the Fed communiqué of the January meeting very cautiously went in our way of a cyclical USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite remained the driver for currency trading. The EU ‘solution’ (without any details) to some extent eased the tensions on higheryielding EMU government bonds, but uncertainty still prevails. The Greek issue highlighted also the weak points of the EMU framework.
This continues to weigh on the euro. On top of that, recent economic evidence didn’t support the cyclical case of the euro either (cf. poor EU growth and production data recently). The Fed discount rate hike mid February, even as it is in the first place a technical step on the way to normalization of the money markets, still might be seen as supportive to our cyclical USD rebound. So, we continue to feel comfortable to ride the standing EUR/USD downtrend. In a day-today perspective, we indicated at the end of last week that we had the impression that there might be room for some consolidation on the recent sell-off a as quite a lot of bad news had been priced in for the euro. This assessment remains valid, we think.
Technical picture. Since December EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating that the EUR/USD bull-run has run its course and that EUR/USD trading is entering a new era. The trend in this pair is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. For now, the 1.3850 area (previous high) is the first barrier on the topside. Recent price action reinforced our feeling that a (swift) return to/beyond this barrier won’t be easy. 1.3405 (62% retracement) is the first target on the EUR/USD charts.
LT the 1.2886 April low might gradually come into the picture. EUR/USD came three times close to the 1.3443 support area, but a real test didn’t occur (1.4333 = new low). This is an indication that the downside in this pair was a bit exhausted. We don’t feeling any need to change our standing EUR/USD negative bias. This was and remains a sell-on-upticks market. Nevertheless, short-term we wouldn’t be surprised to see some more sideways price action in the 1.3443/1.3850 trading range.
On Tuesday, the picture for the USD/JPY remained heavy. This was a bit strange as global risk appetite wasn’t that bad. So, technical considerations and spill-over effects from other cross rates (EUR/JPY and GBP/JPY) probably played a role. The pair struggled to hold above the 89.00 mark in Asia and during the European trading hours (despite a strong stock market performance in Europe). After the close of the European markets, a broader correction in the US triggered some stop-tripping in USD/JPY, too. The pair tested the 88.55 area, but no break occurred. The pair closed the session at 88.85, compared to 89.13 on Monday evening.
Overnight, USD/JPY revisited the key 88.55 area (new reaction low at 88.47), but the break could not be extended. Asian stocks are showing moderate gains, but this is not a strong enough reason for USD/JPY to move away from the key 88.50 support area. Some correction on the recent global dollar strength is also weighing on this cross rate.
Global context: USD/JPY reached a correction low in the 84.83 area at the end of November. In December, the pair staged a remarkable rebound as the better than expected US data were enough a reason to take profit/scale down USD/JPY short exposure. The new Japanese Fin Min softening its tone on the yen added to the USD/JPY supportive picture, but early January the weaker US payrolls blocked the rebound. In a medium term perspective, the December USD/JPY rebound called off the MT downtrend of the US dollar against the yen.
Recently we had a cautiously positive bias for USD/JPY. In a broader perspective, we continue to see USD/JPY longs as a good trade to play the global recovery story. The loss of momentum on global (equity) markets since the end of January didn’t really support our case. Nevertheless, as we hold on to our global positive eco view, we think the global cyclical recovery story might still turn out being USD/JPY supportive. We are well aware that the picture remains very fragile, but for now we stick to our standing USD/JPY long call. The 88.50 support area is still the line in the sand. A sustained break below this level support would reject our standing USD/JPY long call (stop-loss). The red alert is on. We might be reaching a ST make-or-break point
On Tuesday, sterling entered calmer/less stormy waters after Monday’s sell-off. Intraday euro weakness pushed the pair temporary lower early in Europe, but the move was reversed as EUR/USD recouped the earlier losses later in the session. EUR/GBP closed the session at 0.9094, compared to 0.9047 on Monday.
This morning, Nationwide consumer confidence jumped from 74 to 80. later today markets look out for the UK services PMI. However, the global stories will continue to set the tone in this cross rate, too (Greece, global euro strength/weakness).
Global context: During the August/mid October period, sterling showed additional losses as the BoE increased the amount of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. Recently, there were some very cautious signs that the UK economy is leaving recessionary territory, too. From a monetary policy point of view, the question is whether the UK economy has already reached the point where sterling could become a cyclical play. Early February, the BoE shifted as expected, to a sit-and-wait approach. However, its assessment on growth and inflation remains soft and this view was confirmed in the February inflation report. So, we don’t have any indication that the BoE will be a front-runner in scaling back policy stimulation when compared to the Fed or the ECB. In this context, we think that the rebound of sterling has gone far enough. Of course, the euro was haunted by the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continues to weigh on the EUR/GBP pair, too. Nevertheless, we think that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.
Recently, the picture for EUR/GBP was negative as the pair dropped below the medium term support area (0.8834). At the end of January the slide eased and the pair even staged a modest rebound. Two tests of the 0.8834 neckline were rejected, but on Thursday the break finally succeeded. Apparently, the ongoing BoE talk on the possibility of more QE ‘convinced’ markets that any interest support for sterling is still very far away. This rebreak materially improved the picture for EUR/GBP. After the test of the 0.9154 resistance, some consolidation might be on the cards. Nevertheless, we don’t expect any sustained sterling rebound anytime soon. 0.9240 is the next medium term target on the charts.
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