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Home Market Updates Daily fundamental analysis Euro under Pressure Ahead Of This Week's Bond Auctions
Euro under Pressure Ahead Of This Week's Bond Auctions

Euro under Pressure Ahead Of This Week's Bond Auctions

2011-01-10 09:56:53

 

 

On Friday, EUR/USD continued to fight an uphill battle. Investors in all markets were counting down to the US payrolls report. However, at the same time, tensions in peripheral European bond markets continued to build. As was the case over the previous days, EUR/USD suffered from overall dollar strength and poor sentiment on the single currency at the same time. So, EUR/USD already tested the key 1.2969 support area in European trade. However, a real break didn't occur yet. The EMU eco data (final Q3 GDP, EMU unemployment rate and the German industrial production) were close to expectations and were largely ignored. EUR/USD hovered close to the lows going into the US payrolls report. The payrolls didn't meet the high expectations that had grown in the market after Wednesday's ADP report. However, this was not really able to change the fortunes of EUR/USD. EUR/USD briefly returned to the 1.30 area, but the rebound petered out very soon. Mr. Bernanke in an appearance before a Senate Budget committee indicated to see reasonably good growth in the year of 2011. However, he expected that this growth still wouldn't be strong enough to sharply reduce unemployment anytime soon; he also saw no immediate inflation risks. So, there was no reason to expect a change in the Fed's policy approach. Another EUR/USD selling wave kicked around the close of the European markets in step with a downward correction on the equity markets. US equities recouped most of the intraday losses later in the session, but once again this was no help for the single currency. EUR/USD closed the session at 1.2907, compared to Thursday's close of 1.3003.
Today, the eco calendar is rather thin on both sides of the Atlantic. So, one might expect the market focus to turn again to the European debt crisis. This morning, there were leaks on the financial newswires that France, Germany and other Euro group countries are raising pressure on Portugal to seek help from the EU and the IMF. As usual, these kinds of stories are denied by all parties involved. Nevertheless, this week might again bring an important chapter in the epos of the European sovereign crisis. Markets will keep a very close eye on the auctions from Portugal (Wednesday), Italy and Spain (Thursday). The amount of the Portuguese auction is limited (between ‚ā¨0.75 and ‚ā¨1.25 billion). However, the price/spread might be an indication whether it will be sustainable for Portugal to fulfill its funding needs on a standalone basis. In case of a high spread, one might expect further pressure on Portugal to look for assistance. In any case, the issue of the financing/sustainability of European sovereigns will remain high on the agenda over the next days. In such a context, it is difficult to see a euro positive sentiment.
In the last two months of the year 2010, the euro zone debt crisis remained the most important factor for EUR/USD trading. The single currency lost around 10 big figures in the month of November and reached a correction low at 1.2969 on the month November the 30th. Since early December, EUR/USD entered calmer waters. The European debt crisis remained a source of uncertainty but global investors turned again more positive on risk, preventing further euro losses. Regarding the USD side of the story, the budget agreement between the Obama administration and the Republicans was seen as supportive for US economic growth. The US eco data weren't that bad either. However, until early last week, it failed to give the dollar a big boost. So, there was no strong enough trigger to push EUR/USD out of the 1.2969 and 1.3500 trading range.
Since mid last week, the tide turned again more negative for the EUR/USD cross rate. Some US eco raised the hope that US economic growth might be gaining traction (ADP report) while at the same time uncertainty on the European sovereign crisis came again to the forefront. Both factors conspired to push EUR/USD lower. The US payrolls were slightly disappointing and slowed the rise of the dollar overall. However, for EUR/USD uncertainty on the EMU sovereign debt crisis remained the dominant factor. So, EUR/USD dropped below the key 1.3055/1.2969 at the end of last week.
Last week's break below the 1.3055 neckline was a first high profile alert on the technical charts as it painted a short-term double top formation on the charts. The break below the 1.2969 range bottom opened the door to meet the targets of this formation which are coming in at 1.2675/10 quite soon (The 1.2588 24 August low is also a high profile mark on the technical charts). So, we put risk for EUR/USD to return to the 1.26 area. From a technical point of view, the pair is in oversold territory, but in the current environment, this is not enough a reason to row against the tide yet.

Support comes in at 1.2976 (Today low), at 1.2873, at 1.2795 (62% retracement since 2010 low + daily envelope), at 1.2703 (Weekly envelope), at 1.2675/10 (Targets double top of 1.3055) and at 1.2588 (24 August low).
Resistance stands at 1.2946 (Daily envelope), at 1.3022 (Reaction high), at 1.3043/58 (Weekly envelope/STMA + breakdown hourly), at 1.3142 (Reaction high hourly), and at 1.3155 (MTMA).
The pair is in oversold territory.

USD/JPY

On Friday, the dollar remained well bid ahead of the key US payrolls release. USD/JPY was seen near the recent highs in the mid 83-area during the European morning session. The US payrolls report brought some mixed signals, but basically failed to live up to the high expectations created by the ADP labor market report. So USD/JPY briefly spiked to the low 83.00 area upon the release, but after all the damage for the dollar remained limited. Nevertheless, US bond yields declined several basis points after the release. So, as the rise in US bond yields was an important factor behind the recent rebound in USD/JPY, the topside in this cross rate obviously become tougher. USD/JPY closed the session at 83.15, compared to 83.33 on Thursday evening.

This morning Japanese markets are closed. Asian equity markets are mostly lower as global investors turned less positive on risk. At least for now, the impact on USD/JPY trading is limited.


After the Mid-September interventions, USD/JPY soon resumed the established downtrend as investors prepared for more QE in the US. In addition, Japanese authorities had little room of maneuver to implement aggressive interventions to stop the rise of the yen, as it was/is difficult for excess countries to justify an ‚Äėartificial' weakening of their currency to their counterparties within the G20. However, the global decline of the dollar slowed after the November FOMC meeting (some kind of buy the rumor-sell-the fact reaction on QE-2) and USD/JPY developed a bottoming out process. The increase in US bond yields was an important driver behind this move. USD/JPY rebounded from the 80.21 low reached early November and tested a number of times the 84.40/50 area at the end of the month November and in the first half of the month December. However, a break didn't occur and at the end of last year, USD/JPY returned lower in the 84.40/80.22 trading range. Recently we favored a scenario of range trading in this 80.00/84.50 sideways pattern. Within this range, we looked to sell into strength as we saw the 84.50 area as providing strong resistance. For now, this scenario is still valid, especially as most other Asian currencies are holding strong against the dollar. Nevertheless, an unexpectedly sharp rise in US bond yields (e.g. due to an unexpected acceleration in US economic activity) is the main risk factor to overthrow this scenario. However, after last week's payrolls report, this scenario has become less probable. So, the 81.00/84.50 sideways trading range might continue to play its role

Support is seen at 82.93/85 (STMA + Boll Midline/Reaction low + Daily envelope), at 82.44 (Broken MTMA), at 82.28/22 (Break-up daily + hourly) and at 81.96 (Weekly envelope).
Resistance comes at 83.70/71/91 (Reaction highs hourly), at 84.07, at 84.51/70 (Reaction high/Boll top) and at 85.40/94 (Reaction highs).
The pair is moving into overbought region.

 

EUR/GBP

On Friday morning, the sell-off in EUR/GBP slowed temporary. The euro was still in the defensive overall as spreads of peripheral European bonds continued to widen. However, after the sell-off in EUR/GBP earlier last week and with no UK data on the calendar there was no strong driver enough for another big move going into the US payrolls release. However, a new euro selling wave kicked in late in European trade. A disappointing US payrolls release was not able to prevent further EUR/USD losses and this dragged EUR/USD lower, too. EUR/GBP even dropped below the key 0.8334 support and closed the session at 0.8302, compared to 0.8404 on Thursday.
Today, calendar of UK eco data is again very thin. So, one might expect the focus for EUR/GBP trading to be on the euro side of the story. In this respect, the uncertainty on the funding of EMU peripheral governments going into this week's auctions probably will continue to weigh on the single currency.
Global context: EUR/GBP set a correction high of 0.8942 on October 25 as investors anticipated that the harsh budgetary measures would weigh on UK growth. This was seen raising the possibility that the BoE would enlarge its program of asset purchases. However, the strong Q3 GDP release torpedoed the hopes for additional BoE policy accommodation short-term and sterling started a comeback. Renewed tensions in the euro zone also caused a further scaling back of EUR/GBP exposure. The pair set a correction low at 0.8335 on December 01. From there, the pair joined the broader consolidation pattern/rebound of the euro.
Looking at the fundamentals, we didn't t expect a major comeback of sterling (against the euro and overall). The impact of the budgetary measures on growth has still to materialize in the months to come. Early December, the EUR/GBP pair showed some tentative signs of bottoming. The combination of this technical pattern with our sterling-cautious attitude from a fundamental point of view made us installing a cautious buy-on-dips approach. At first, the rebound had no strong momentum, but over the last two weeks of the year 2010 the pair gradually found a stronger footing and temporary regained the 0.8527/98 area (series of lower highs in November). Last week's stronger than expected manufacturing PMI and a setback in the euro overall blocked the rebound in EUR/GBP and even prompted a profit taking move. Of late, we assumed that the 0.8334 range bottom would offer strong support for the euro against sterling. However, at this stage overall negative sentiment on the single currency is the dominant factor for currency trading and EUR/GBP is no exception to this rule. So, our stop-loss protection to defend a break below the EUR/GBP 0.8334 support has been hit. We stand aside for now. The technical picture has turned EUR/GBP negative. The 2010 low (0.8068) is the next high profile target on the charts.
Support comes in at 0.8293 (Reaction low), ar 0.8280/73 (16 Sept low/76% retracement since 2010), at 0.8255/20 (Weekly/daily envelope) and at 0.8177 (Weekly Boll bottom).
Resistance is seen at 0.8334 (Neckline double top), at 0.8381 (Broken channel since 2010 low), at 0.8402 (Breakdown daily +STMA), at 0.8427 (Reaction high) and at 0.8493 (MTMA).
The pair is in oversold territory