In a technically driven session, the German bund tested the key 120.92 resistance level for a second trading day in a row. A sustained breakthrough failed and the Bund ended slightly above its opening level. The June note future showed a similar trading pattern but in the US the yield curve bull steepened slightly on dovish comment by Fed chairman Bernanke.Quiet sieways oriented FX trading at onset new week
Currencies traded range-bound and technically inspired as the calendar was uneventful. While calendar heats up today, we think that most investors will await the key ECB meeting on Thursday before considering whether the euro has more upside or whether it is profit taking time. Similar picture for USD/JPYUS Equities ended the rather uneventful session unchanged on Monday. The S&P rose 0.03% led by materials and health care, while technology shares dropped 0.50%. This morning, Asian shares trade mixed, while China outperforms.The yield on Portuguese five-year benchmark bonds rose yesterday to almost 10%, but the caretaker Prime Minister Socrates vowed to keep resisting a foreign financial rescue for the debt-laden country. This morning, Moody's downgraded Portugal's sovereign bond rating from A3 to Baa1, still under review for a possible downgrade.Fed Chairman Ben Bernanke said overnight that the increase in US inflation is driven primarily by rising commodity prices globally and is unlikely to persist. In the medium term he added, that inflation, if anything, will be a bit low.Euro zone finance ministers will meet on Friday in Budapest to discuss Portugal's options to solve its debt problems under a caretaker government, including whether it is capable of requesting EU financial aid, a source said.Australia's central bank held interest rates unchanged at 4.75% this morning, reiterating that the strong local currency, moderate wage growth and intense retail competition would help keep inflation contained for the year ahead.The United States will hit the legal limit on its ability to borrow no later than May 16, Treasury Secretary Geithner said on Monday, ramping up pressure on Congress to act to avoid a debt default.Brent crude oil prices rose yesterday above $121 a barrel, their highest level since 2008 as Nigerian election delays and a short-lived strike in Gabon jointed the list of geopolitical supply concerns.Today, the eco calendar contains the euro zone (final) and UK services PMI, the euro zone retail sales and US non-manufacturing ISM
On Monday, EUR/USD hovered listless and directionless in a tight range in a session devoid of important eco releases or other events. Other markets like equities and bonds showed no more animus. Only commodities, especially oil traded with vigour and the CRB index has now mostly recouped the post- Japan earthquake sell-off.
There were more signs that the doves are still in the FOMC's driving seat, resisting the call of the impatient hawks to start exiting the very accommodative stance. The hawks' offensive has been countered by NY Fed Dudley on Friday, which got the blessing of Bernanke overnight. The Fed chairman said that the recent increase in inflation was driven by commodity prices globally and that it is unlikely to persist. It is transitory and added the chairman, medium term inflation if anything will be a bit low. These are not the words of a Fed chairman who is trigger- happy to fight the next eventual inflation battle. Other renowned doves like Atlanta Fed Lockhart said inflation will remain moderate, while the St-Louis Fed research director said QE-2 is in the bag and added he expects the Fed to keep its balance sheet constant for at least 1 FOMC meeting after QE-2 ends and thus in the mean time re-invest maturing assets. So, it seems that the debate on a potential change in Fed policy is postponed by a number of months.
Intra-day, EUR/USD hovered following a technically temporary inspired spike in Asian trading between 1.4193 and 1.4250, directionless and little changed overnight, suggesting that Bernanke's words, which are intrinsically euro positive, were already largely discounted. The pair closed yesterday at 1.4221, down from Friday's 1.4235 closing level.
Regarding trading today, The EMU final services PMI and retail sales shouldn't move the market. The US non-manufacturing ISM is more important from an economic point of view. It should print strong, but slightly off February's reading. If recent trading patterns hold, than even a stronger figure won't be enough to give the dollar more than very temporary support, as the ECB meeting of Thursday remains on the radar of traders and investors. The situation in Portugal continues to deteriorate, but doesn't look to be an item anymore for currency markets. After all, it is a small spot in the big euro area. However, no complacency as an overt crisis may still make EMU official nervous and prone to lose their cool. However, it is a risk factor, not a main theme currently. There is a long list of Fed and ECB speakers that may give traders some food for thought, but Fed speakers have already expressed their views on policy and the ECB ones shouldn't utter their views two days before a key meeting. We will scrutinize the Minutes of the March FOMC meeting to get a flavour of the direction of the debate inside the Council, but as all participants have in the mean time expressed their views, it would surprise us to read much new in the Minutes. Therefore, we think that EUR/USD will continue to show the recent trading pattern. Overbought conditions and the nearness of key resistance levels cap the upside going into the ECB meeting on Thursday. Periodic dollar buying won't carry far and will be met by renewed euro buying. The ECB meeting on Thursday will be decisive whether key resistance is broken or whether a more sustained profit taking pushes the pair again lower.
Regarding the technicals, the pair is near very key resistance levels, which if broken sustainably may accelerate the euro buying. Indeed the 1.4266 level is the incoming downtrendline since the historical high and 1.4283 is the November high and the neckline of a massive double top. A sustained break would be highly relevant. The different outlook for official rates on both sides of the Atlantic might provide a trigger for such a break. We have been skeptical of such a break occurring, as in a broader perspective, there is already a massive double bottom in place in EUR/JPY and also EUR/GBP shows some possibilities in this direction. Such a generalized euro strengthening would rapidly push the trade weighted euro into dangerous territory and risk to cool the EMU economy fairly fast, which risks being a disastrous for the periphery. So, the move could exhaust itself, but the timing of it is object of debate. However, it seems that the ECB isn't yet concerned about the euro (is still not expensive in trade weighed terms) and thus investors shouldn't neglect the possibility of such a break, especially should Trichet up the hawkishness during his press conference. However, we would not front run such an event, but it might be wise to set some stop loss protection above the resistances.
EUR/USD (2007- ): at technical crucial levels, which if sustainably broken would theoretically point to targets at 1.5706 and 1.6690. Has a Mr. Trichet notion of technical analysis? Will he keep rhetoric in check?Support comes in at 1.4183 (week low), at 1.4158 (MTMA) and at 1.4129/25 (28 weekly envelop/ weekly STMA).
Resistance stands 1.42.66/69 (today high/downtrendline since historical high), at 1.4283 (Nov. 2010 high/neckline double bottom/ daily envelop), at 1.4327 (Bollinger top) and at 143.73 (76% retracement Nov 2009 high).
The pair is in overbought conditions
On Monday, USD/JPY ended the session exactly at the same 84.06 level where it closed on Friday eve. Intra-day, the pair slid very gradually somewhat lower in the European session, probably on disappointment that the test of the technical key 84.51 level on Friday failed. However, there was no momentum at all behind this micro- move lower and the losses were easily recouped later in the US session.
Overnight, Japanese equities are under downward pressure, but off intra-day lows. A Japanese Minister said that the government might issue more debt to finance the reconstruction, while FM Noda plans to seek more cooperation from the G7 at a meeting on April 14. The G7 intervened to reverse a strengthening yen, which succeeded well. The underlying picture is still yen negative as carry trades are still in vogue. The USD/JPY bulls of course aren't throwing in the towel after a failed test of key resistance at 84.51 with a new high at 84.72 and might look for a new test. Maybe the remarks of Noda have given them some courage to try it again. The pair is up from yesterday's close, trading at about 84.40. We don't see much on the calendar (see EUR/USD) that might help them, but a stronger-than-expected US nonmanufacturing ISM might be a trigger for a next test. However, overbought conditions and the importance of the resistance level makes us think that also the second test will fail. However, it is no time for complacency. A sustained break shouldn't be ignored and might have far-reaching technical importance.
EUR/JPY: yen is in sideways trading range, but top was tested in the wake of the US payrolls. We still favour a buy-on-dips approach, but a sustained break above would be highly favourable for dollar, but it is risky to front run on such a potential breakSupport comes in at 83.85/68 (week low/STMA), at 83.23 (break-up daily) and at 82.73 (weekly).
Resistance is seen at 84.47 (week high), at 84.74/78 (recovery high/Weekly Bollinger top) and at 84.86/91 (Monthly MTMA/Bollinger top).
The pair is in overbought territory.
On Monday, EUR/GBP lost some ground, as markets digested the recent euro rally. The losses were during the Asian session. During the European and US session, movements were very limited and euro positive. In the end, EUR/GBP closed at 0.88151 compared to 0.8834 on Friday eve.
There was talk in the market about the possibility of M&A related flows in favour of sterling, as Vodafone is selling a stake in France's SFR. The construction PMI was stronger too, but we wouldn't draw too many conclusion from it, neither did the market. While the EMU calendar is unimportant today, the release of the UK services PMI is more interesting. Services PMI is expected to stabilize at 52.6 in March after a significant decline in the month before. We believe however that a slight increase is not excluded, in which case sterling might gain somewhat. All in all, we think that as per other euro crosses, the market will wait on the outcome of the ECB (and BoE) meetings to express their opinions on future currency moves. Given the recent strong euro run and overbought conditions, there is some scope for a correction in the pair ahead of Thursday, but also here it should be very limited in nature.
Since early January, the pair moved up and down within a range of 0.8285 and 0.8672. In the February inflation report, the BoE saw rising upside inflation risks, but BoE governor King was less committed to a rate hike than a lot of investors had anticipated. So, there was a window of opportunity to take profit on sterling long positions. EUR/GBP moved gradually away from the February lows and the ECB talk at the March meeting propelled EUR/GBP beyond the 0.8500/29 resistance. This improved the short-term picture in this cross rate. The pair also rose beyond the 0.8672 level (previous 2011 high), but the EUR/GBP rebound slowed temporary earlier this week. The overall picture remains EUR/GBP constructive. So, the 0.8818/08941 area is the next upside target on the charts. There is no reason to row against the tide and even as the current move matches our long-term sterling skeptic attitude, we get some fear of heights.
EUR/GBP: euro positive picture with risk for extension to the 0.89417 October 2010 high, but currently in overbought conditions and also ahead of ECB meeting investors were remain largely sidelinedSupport comes in at 0.8792/84 (week low/weekly envelop), at 0.8773 (reaction low hourly/MTMA), and at 0.8753 (30 March low).
Resistance is seen at 0.8841/44/ (weekly +Bollinger top/Reaction high hourly), at 0.8853 (year high), and at 0.8886 (Bollinger top).
The pair is in overbought territory.
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