Sunrise Market Commentary

• Trichet still puts inflation risks first
  In spite of recent disappointing activity data, ECB's Trichet didn't soften his inflation rhetoric yesterday. Upside inflation risks are still seen as the primordial concern, while growth is expected to continue albeit at a more moderate pace. Bonds however rally higher both in the US and the euro zone, which if confirmed, would improve the technical outlook.
• FX :EUR rebounds on Trichet
  Recently EUR/USD came under pressure on the back of poor European eco data. However, Mr. Trichet holding to its established anti-inflationary approach blocked the correction. However, we're not fully convinced on the euro rebound potential yet. USD/JPY is hit by a profit taking move.

The Sunrise Headlines

• Wall Street closes slightly higher on solid retail sales data, but Asia is mainly down this morning.
• Oil extends rally to above 124 USD/barrel.
• IMF warns on global inflation, as the forces pushing prices up 'appear to be fundamental in nature', denouncing the bubble hypothesis.
• China's producer price inflation at a 3-year high of 8.1% Y/Y
• Australia's central bank raised its forecasts for inflation, while cutting its growth forecasts. The bank now expects inflation back in its target band by the end of 2010.
• AIG suffers USD 15 B credit-related write-downs in Q1 and will raise USD 12.5 B new capital to strengthen its balance sheet.
• Citigroup considers USD 400 B asset sale to reduce costs and restore profit growth.
• Sovereign Bancorp to raise USD 1-2 B fresh capital.
• ECB quarterly lending survey and US trade balance in the focus today

Currencies: EUR/USD Rebounds On Trichet

On Thursday, all eyes were on the ECB interest rate decision and the press conference. In the run-up the press conference, currency traders obviously kept the recent poor European eco data in mind with EUR/USD trading in the low 1.5300/50 area in the morning in Europe. At the press conference, ECB's Trichet didn't give any sign of a softening in the established anti-inflationary policy approach. He also didn't give any indication that the Bank is giving any more weight to a scenario of European growth slowing more than was anticipated until now. At first EUR/USD traders doubted what direction to take after this 'confirmed' hawkish approach, but at last it was enough for EUR/USD to return to the 1.54 area. So, despite some intraday swings EUR/USD closed the day at 1.5394, little changed from the close on Wednesday.

Today the calendar contains the US trade balance figures and the ECB quarterly bank lending survey. Recently, the trade balance data showed that the US economy is taking advantage of the weaker dollar will be a very gradual and bumpy process. Oil and the oil price are an in important factor of noise for this series.

We have/had a long-standing dollar negative view and we're still not convinced that the worst of the credit crisis and its impact on the US economy is over. However, recently we couldn't ignore the warning signal of EUR/USD testing a first key support area as markets grew more attentive to the recent deterioration in European eco data. At least for now Mr. Trichet and the ECB didn't openly subscribe the analysis of a marked slowdown in European economic activity. So, any ECB rate cuts are not on the table in the near future and this helped EUR/USD to regain the bottom of the sideways trading range that was under severe strain yesterday morning. It might be a first indication that the EUR/USD correction might lose some momentum. However, we're not fully convinced by yesterday's price action yet. So, we want some more evidence that a short-term bottom is indeed in place after yesterday's unchanged policy stance of the ECB. In this respect it would be interesting to see the market reaction in case of a new batch of poor European eco data as we have the impression that they still have the potential to harm the euro even after yesterday's unchanged ECB approach.

The rejection of the key area 1.60 was a sign that the topside in this pair has become better protected and triggered a correction. EUR/USD dropped below a first support level (1.5510) and the key 1.5340 area (March correction low) came under severe pressure yesterday. The test was rejected, but the lows are still within striking distance. We take a more neutral stance for now and wait for more confirmation before concluding that the recent EUR/USD correction has run its course and that some consolidation might kick in. In a day-to-day perspective, we have some doubts in the potential for EUR/USD to extend yesterday's rebound. A rejected retest of the new lows could go some way in confirming the consolidation thesis. We also keep a close eye on the price action in EUR/JPY!

EUR/USD: saved by Trichet?

Support stands at 1.5386 (Reaction low hourly), at 1.5326/12 (Daily envelope/ reaction low), at 1.5282/75 (11March low/23% retracment), at 1.5253 (Weekly envelope), at 1.5195 (50 retracement), at 1.5145 (05 Mars low), at 1.5107 (Irr C).

Resistance is seen at 1.5440 (Reaction low hourly), at 1.5458/68 (23%retracement+ flag top/Daily envelope), at 1.5550 (MTMA) and at 1.5693/07 (Previous reaction highs).

The pair is in oversold territory.

USD/JPY

Yesterday, USD/JPY trended lower throughout the session. The pair traded in the high 104.80 area early in Asia but in bumpy trade slipped lower to close the session at 103.74, a loss of one big figure. The slide probably was a combination of fundamental and technical factors. The less buoyant stock market sentiment capped the rally in this pair already earlier this week and the loss of some short-term technical support levels then pulled the trigger for some additional profit taking following the recent rally. Also the sharp swings/losses in EUR/JPY are a factor to watch out for.

This morning, Asian/Japanese stocks remain under pressure even after the consolidation in US stock markets yesterday evening. Data-wise, the Japanese leading indicators were perfectly in line with expectations.

Recently the downside in USD/JPY became better protected as improving stock market sentiment caused a gradually unwinding of yen long positions. However, the pattern was questioned this week. Global stock market indices (e.g. the S&P did run into resistance and this blocked the uptrend in USD/JPY. The pair lost some shortterm support levels (including the standing uptrend line). The picture on the stock markets is still far from clear, but a sustained break above the 1406 area in the S&P won't be that easy. Yesterday, we indicated that a clear break above the recent highs could become difficult short-term. We turned more neutral on USD/JPY and advocated to consider some profit-taking on the recent rally. We hold on to this approach. The correction might have some further to go.

USD/JPY: correction

Support stands at 103.34/22 (23% retracement/Last week low), at 103.13 (Daily envelope), at 102.57 (LTMA) at 102.33 (1st tgt double top 104.01), at 102.11/92 (Strac/Break-up daily).

Resistance comes in at 104.01/09 (Neckline Double top/Reaction high hourly), at 104.33 (daily envelope), at 104.56(ST breakdown) at 104.94 (Uptrend line), at 105.62/69 (Week high/ Reaction high)

The pair is in neutral conditions.

EUR/GBP

Yesterday, EUR/GBP mostly tracked the price action in EUR/USD. The pair set intraday lows in the morning session in Europe and than gradually recovered throughout the session fuelled by the rebound in EUR/USD after the ECB press conference. The BOE as expected left rates unchanged at 5.00 % and the decision had no material impact on EUR/GBP trading. EUR/GBP closed the day at 0.7855; not than much changed from the 0.7863 close on Wednesday. This morning, the EUR/GBP extends its rebound.

Today, the UK calendar is empty.

Mid April, we picked up the technical signal of EUR/GBP dropping below a medium term uptrend line and saw this as a window of opportunity for sterling to enter calmer waters and even for a correction. However, the sterling rebound already run into resistance last week on poor UK data. From a fundamental point of view, we remain cautious/skeptical on the long-term rebound potential of the sterling as we expect UK economic data to remain weak in the foreseeable future. So, any further downside in this pair should come from global euro weakness, rather than from sterling strength. EUR/GBP came within striking distance of a first important support level (0.7746, March 24 low) last week but this test is rejected. We see the downside in this pair rather well protected. The break above the short-term flag top even suggests some short-term upside in this pair.

EUR/GBP: downside well protected

Support comes in at 0.7871 (STMA), at 0.7857/43 (Daily envelope/reaction low), at 0.7815 (Week low), 0.7766 (Reaction low/Boll bottom), at 0.7746 (24 March low) and at 0.7726 (Weekly envelope).

Resistance stands at 0.7919/23 (Broken LTMA/reaction high +daily envelope), at 0.7932 (50% retracement/ Boll Midline) and at 0.7947 (30 April high) at 0.7971 (62% retracement).

The pair is in neutral territory.

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Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.