Sunrise Market Commentary
- Fixed Income: Global bonds in wait and see mode
A thin, uneventful calendar and ongoing negotiations on the second Greek rescue package kept investors sidelined yesterday. Today might be the big day, as the Greek negotiations may finally land. ECB and BoE meetings should also get a lot of attention.
- Currencies: euro extends rebound as Greek debt talks continue
On Wednesday, there was hardly any news to guide the price action in the euro cross rates. EUR/USD remains well underpinned as the hope on a Greek deal remains alive. EUR/GBP even neared the topside of the recent consolidation pattern. Greece, the ECB and the BoE will decide whether EUR/USD and EUR/GBP can start another up-leg.
The Sunrise Headlines
- US Equities reversed their losses on Wednesday supported by strength in financials and technology shares. The S&P ended the session 0.20% up. This morning, Asian shares trade mixed.
- A dispute over pension cuts stalled talks between leaders of Greece's fractious national unity government last night, forcing Finance Minister Venizelos to go to the country's financial backers with an incomplete deal. This evening, a Eurogroup meeting will be held in Brussels
- China's annual rate of inflation rose unexpectedly in January, breaking a fivemonth softening trend. CPI inflation spiked up from 4.1% Y/Y to 4.5% Y/Y as spending jumped during the Chinese Lunar New Year holiday season.
- The Bank of England is expected to inject more cash into the economy to shore up a stuttering recovery. The central bank is expected to announce £50 billion in additional QE, although opinions might be split.
- Italian Prime Minister Monti is confident reforms undertaken by his country over the last few months will help to soften any blow from an unruly default by euro zone partner Greece.
- Brent crude oil prices ($117.60) jumped higher on Wednesday supported by a government report showing that stockpiles rose less than expected last week. The oil price is now again at its highest level since August last year.
- Today, the eco calendar contains the US jobless claims, UK trade balance & industrial production. The ECB and BoE will decide on monetary policy and in the evening, a Eurogroup meeting takes place in Brussels.
Currencies: Euro Extends Rebound As Greek Debt Talks Continue
EUR/USD
On Wednesday, EUR/USD price moves had been contained to a very narrow sideways range. Traders held a wait-and-see mode looking for the outcome of the Greek debt talks.
Yesterday, the EUR/USD trading developed in a narrow sideways trading range near the recent highs for most of the European and US trading session. The rumour mill on the Greek austerity/debt negotiations continued. However, there were few indications that a final step to a conclusion was in the making So, EUR/USD held roughly within a 1.3245/90 trading range for most of the session. At the end of the European trading session, some short-term players apparently tended to lose patience. EUR/USD reached an intraday low in the 1.3220/25 area. However, there were not follow through losses and the pair soon reversed the blip lower. EUR/USD closed the session at 1.3260, little changed from the 1.3261 close on Tuesday evening.
Overnight, the never-ending story on Greece continued. There is no final agreement on a new austerity package. There is still disagreement between Greek policymakers on €300 million of pension cuts. This looks manageable, but an agreement is no yet finalized and this is also true for the next EU/IMF bailout package. Nevertheless, markets still see a 'solution' as coming closer. EUR/USD is trying to move north of the 1.33 area at the moment of writing.
Later today, the calendar of eco data is again thin. In the US, the jobless claims have market moving potential. In the wake of last week's US payrolls report, markets were in doubt how to play strong US data. There were some tentative signs that the dollar might become a bit more sensitive to the better US eco data. However, in the end, the gains of the dollar, especially against the euro, could not be sustained. The hope on an second Greek bailout plan kept the euro underpinned. This issue continues to linger much longer than expected, but for now it causes no damage for the euro. The claims have potential to move EUR/USD, but at the same time the ECB press conference will start. We expect the ECB president to keep a wait-and-see approach as they will look out for the result of the second LTRO at the end of this month. Remarks from ECB president Draghi that the economic shows tentative signs of improvement could be a slightly supportive for the single currency. So, EUR/USD trading is still subject to conflicting factors, but as long as the hope on a Greek deal is keep alive, the euro apparently is still enjoying the benefit of the doubt. There will be a lot of marker chatter in the run-up to the Eurogroup meeting, but who dares to predict that this meeting will bring a final conclusion on the Greek debate. Nevertheless, the ST technical picture for EUR/USD has improved too.
Technical Picture. During the last quarter of 2011, EUR/USD was captured in a standing downtrend which lasted till mid January. The pair dropped below several important support levels, including the key 1.2867 area (Jan 2011 low). Mid January, the decline of the euro slowed. The euro downgrade of S&P caused EUR/USD to set a new reaction low at 1.2624, but a test of the 1.2588 didn't occur. The decline in EUR/USD was exhausted and a technical rebound kicked in. The pair regained the 1.2858/79 area (Previous low/reaction high) and broke out of a downward trend channel. This indicated that the short-term pressure was easing. The pair got a boost from Fed decision and regained a series of key resistance levels (1.3077; 1.3146 and finally also the 1.3197 reaction high).
The pair is now clearly above the 1.3146/1.3234 (LT neckline/reaction high) resistance (which was our stop-loss area). The short term picture improved further and suggests that there is room for the upward correction to be extended. The 1.3548 (02 Dec high) is the next target on the charts
EUR/USD: break beyond the 1.3234 range top confirmed
Support S1: 1.3234/22/16 Previous reaction high/STMA/Reaction low. S2: 1.3168/63 Previous reaction High/MTMA S3: 1.3090: Reaction low S4: 1.3028/26 Range bottom
Resistance R1: 1.3313: reaction high R2: 1.3386/17: Previous Reaction high/Boll top R3: 1.3459: Previous reaction high.
The pair is in moving into overbought territory.
EUR/GBP
As was the case for the headline EUR/USD cross rate, there was absolutely no story to guide the price action in EUR/GBP. The hope on a Greek debt deal kept the euro well bid, pushing the pair higher in the standing consolidation pattern.
During the morning session in Europe, EUR/GBP drifted sideways in a range roughly between 0.8330 and 0.8350. Markets were still looking out for the 'soon-to-beannounced' Greek debt deal. At the same time there were no UK eco data to change the assessment on the BoE policy just one day before the BoE policy decision. Just before noon, EUR/GBP jumped north of the 0.8350 level. We didn't see any news to explain the move. So, order driven activity will be part of the explanation. We assume that a repositioning in the yen (with the less liquid GBP/JPY cross rate hit harder by yen buying than EUR/JPY) played a role, too. EUR/GBP hit an intermediate high at 0.8367. Late in Europe, the pair returned temporary to the mid 0.8350 area, but the setback was less pronounced than in the EUR/USD headline pair. EUR/GBP even succeeded another upleg. This was due overall euro strength, but some investor caution on sterling ahead of today's BoE meeting might have played a role, too. EUR/GBP closed the session at 0.8383, compared to 0.8342 on Tuesday. This move is a bit remarkable given the strong performance of sterling of late.
Today, the UK calendar is much better filled compared to the previous days. Midmorning, the UK production data and the trade balance will be published. We don't expect the improvement seen in survey evidence of late to be already visible in today's data. So, the data should be a support for sterling. Anyway, the market will be very reluctant to react to 'old-dated' December data, only a few hours before the publication of the BoE policy decision. The consensus expects the BoE to raise the program of asset purchases by £50 bln. There is an outside chance of a £75 bln rise. With the BoE, you never know, but given the recent improvement in the PMI's we prefer £50 bln. We doubt that such a scenario would be able to push EUR/GBP in a new trend move outside the recent barriers. Of course EUR/GBP will also remain sensitive the to news flow from Greece and to the comments at the ECB press conference. (Cfr. Our flash report). We assume that the ECB will wait for the results of the second 3-year LTRO. So, Draghi will be reluctant to 'preannounce' further steps. At the margin this might be slightly supportive for the euro.
This would a fortiori be the case in case of a solution on Greece (Eurogroup meeting). So, a test of the range top might be on the cards, but this should be due to euro strength rather than sterling weakness.
Global context. In December, the EUR/GBP cross rate joined the broader market repositioning out of the euro. The ample liquidity providing by the ECB was a negative for the single currency too. Investors are well aware that the ECB will keep monetary policy extremely loose in the foreseeable future and that even further policy easing is likely. The poor eco outlook and the unresolved debt crisis caused the euro to lose its advantage over the UK currency. We are no big supporters of the UK currency being a safe haven in case of market turbulence, but we couldn't ignore the decent performance of the UK currency versus the euro .Over the last two weeks, the pair showed some tentative signs that the decline was slowing .On the downside, the 0.8222 is holding up and several other key support levels are lining up (0.8142/0.8068). We assume that this support area will be difficult to break unless some high profile euro negative event occurs (e.g. in Greece). A sustained rebound above 0.8422 area (end December high) would improve the ST picture in this cross rate. However, for now this looks difficult too (or will Greece do the trick?). So, range trading between 0.8222 and 0.8422 looks to be the name of the game
EUR/GBP: joining the 'Greek hope' rebound
Support S1: 0.8368: Previous reaction high S2: 0.8350/46: Break-up area/STMA +MTMA S3:0.8290/83 Reaction lows.
Resistance R1: 0.8395:Boll Top R2: 0.8410/22Reaction highs R3: 0.8485: Previous reaction low
The pair is moving into overbought
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