Core bonds eked out good gains on Friday, triggered by more Greek brinkmanship. Over the weekend, the Greek parliament cleared a first hurdle to securing a second package on Wednesday (Eurogroup). While the approval of the package is a short term positive, the Greek story still isn't off the tableCurrencies: Political bickering on Greek rescue package prevents euro up-leg
On Friday, Greece remained the key driver for euro trading. Tensions on the approval of the austerity package triggered a setback in the risk rally and this was also visible in the performance of the single currency. Overnight, one hurdle has been removed, but it is doubtful that this will be enough to trigger a break higher of EUR/USD or EUR/GBPUS Equities weakened on Friday led by materials and energy shares after euro zone Finance Ministers put an extra hurdle in front of Greece's second bailout. This morning, Asian shares trade mixed to slightly higher.Greek lawmakers approved overnight a tough austerity package aimed at averting a default, but the vote was overshadowed by violent street protests in central Athens.Japan's economy shrank more than expected in the final quarter of 2011, hurt by slowing global growth, Thai floods and a strong yen. The 0.6% Q/Q contraction was twice as big as forecast.Federal Reserve Chairman Ben Bernanke issued on Friday a call to action to restore US housing markets, saying depressed house prices and sales are a serious drag on the economic recovery.China has instructed its banks to embark on a mammoth roll-over of loans to local governments to avoid a wave of defaults, the Financial Times reports on its website.Rating agency Standard & Poor's announced late on Friday it has lowered its ratings on 34 Italy-based financial institutions saying the downgrades follow the lowering of long- en short-term sovereign credit ratings on the Republic of Italy.Today, the eco calendar is extremely thin.
On Friday, one would expect some calm after the 'storm' of the Eurogroup meeting, with investors' pondering the consequences of the latest 'return to sender' of the Greek austerity proposals. However, the storm didn't ease, it even intensified. This triggered quite a sharp setback on the recent risk rally and EUR/USD nosedived in step.
On Friday morning, it looked as if markets would prepare for a rather calm trading session. The Eurogroup had dismissed the Greek budget proposals. The Greek carousel could make another round, but markets still assumed that in the end a deal would be reached, opening the way for the 2nd bailout plan. So, EUR/USD was off the recent highs north of 1.33. However, the damage was not that big. The pair hovered in the upper half of the 1.32 big figure. There were only few eco data in Europe. Better than expected Italian production data had hardly any impact on EUR/USD trading. The pair ceded ground in the run-up to the US trading session. The sell-off accelerated on headlines that a smaller coalition party of the Greek government was not prepared to accept further austerity measures. Equities dropped deeper into negative territory and EUR/USD fell below the 1.3200 mark. Investors wanted to avoid the Greek event risk going into the weekend. The US eco data were slightly below consensus, but the focus of trading was on Greece. EUR/USD closed the session at 1.3197, compared to 1.3286 on Thursday.
Overnight, the Greek Parliament approved the austerity bill. EUR/USD returned to the mid 1.3250 area after the news of the approval. Later today, the calendar is again extremely light. The sale of short term Italian government Bills will get some attention. However, the focus will stay on Greece. The Parliament giving Green light for the austerity bill has removed one hurdle in the way to a second bailout package. However, the question is whether this will be enough to support a new upleg in the risk rally. The heavy protests suggest that it will be difficult for Greece to implement the new measures. So, the debate on the sustainability of the Greek economic and budgetary situation will continue. The additional Eurogroup meeting on Wednesday is the next milestone in the Greek drama. Sentiment on risk and on the euro probably improved after the Greek vote, but for now we don't expect any euphoria. In this context, we expect EUR/USD to hold to nervous trading around the current levels. Later this week, US eco data (in particular tomorrow's retail sales) and auctions in Europe might come to the forefront. However, (political) event risk on Greece remains high. In this context, we still assume that an outright break higher of EUR/USD will not be that easy, even as the technical picture as improved of late.
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). EUR/USD is now clearly above the 1.3146/1.3234 (LT neckline/reaction high) resistance (which was our stop-loss area). The short term picture has improved 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. In a day-to-day perspective, it looks difficult for EUR/USD to succeed a strong follow-through move higher.
EUR/USD: Political uncertainty on Greek debt deal prevent new up-legSupport S1: 1.3208 Reaction low hourly S2:1.3195/84 Break-up area Reaction low/MTMA S3: 1.3156 reaction low S4: 1.3089: Reaction low S5: 1.3028/26 Range bottom
Resistance R1: 1.3361: reaction high R2: 1.3322: Reaction high R3: 1.3381/86: Boll top/Previous reaction high R4: 1.3459: Previous reaction high.
The pair is in neutral territory.
On Friday, USD/JPY traded in a rather calm in a sideways range between approximately 77.50 and 77.80. However, as such this was quite an interesting development, too. The cross rate preserved Thursday's gains even as sentiment on risk turned for the worse and as core (US) bond yields declined. This suggests that the downside in this cross rate might becoming a bit better protected.
This morning, Japanese Q4 GDP declined more than expected (-2.3% Q/Q annualized). External factor weighted on the export. This release will probably raise the pressure on the BOJ to take further steps to support the economy and prevent further strength of the yen. Today, one would expected USD/JPY to find support from an rising core bond yields. However, for now the reaction is very muted
USD/JPY moving higher in the rangeSupport S1: 77.52 Reaction low S2: 77.34/25 : STMA/Break-up area S3:76.71 Reaction low S4:76.48 Reaction low
Resistance R1: 77.81/98: Reaction high/Boll top R2: 78.28: ST Range top R3: 79.53 : Intervention spike
The pair is moving into overbought territory
On Friday morning, a test of the EUR/GBP range top seemed nigh. However, once again, Greece was the ''game changer'. Rising uncertainty on Greece's commitment to fulfill the demands of the Troika pushed EUR/GBP back lower in the sideways consolidation pattern.
EUR/GBP traded in the 0.8400 area at the open in Europe. The pair had held up very well on Thursday evening, even as the Eurogroup meeting had failed to reach an agreement on a second Greek rescue package. However, throughout Friday's morning session, sentiment on risk deteriorated and profit taking on European equities accelerated. This put the euro under pressure. At the same time, the UK PPI data were reported higher than expected. While this as no factor of importance for the BoE policy , it was a good excuse to reverse the decline of sterling on Thursday evening. Last but not least, the negative headlines from Greek politicians on their commitment to meet the demands of the Troika pushed EUR/GBP to an intraday low in the 0.8351 area. Later in the US session, the decline of the euro slowed. Nevertheless, EUR/GBP closed the day at 0.8375, compared to 0.8400 previously.
Overnight, EUR/GBP profited from the approval of the Greek austerity bill. So, the pair is again moving to the top of the recent consolidation pattern. As is the case of EUR/USD, the headlines on Greece will remain an important factor for EUR/GBP trading. To be honest, we would be surprised if no new hurdles would resurface in the run-up to Wednesdayk's meeting of the EU Finance Ministers. Later this week, the UK calendar is well filled too, with the CPI (Tuesday), the labour market data and the inflation report (Wednesday) and the Retail sales (Friday). After last week's BoE decision to raise the amount of asset purchases, it is a bit too early to speculate on the next step of the BoE. However, as eco data are improving inside and outside the UK, it will be interesting whether sterling is able to profit from better than expected UK activity data (or from a slower than expected decline of inflation).
Global context. In December, the EUR/GBP cross rate joined the broader market repositioning out of the euro. Investors are well aware that the ECB will keep monetary policy extremely loose in the foreseeable future and that even further policy easing is possible. 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 cannot ignore the decent performance of the sterling versus the euro. Over the last three weeks, the downside was blocked, as the 0.8222 support held 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. So, range trading between 0.8222 and 0.8422 is the name of the game, even as upside pressure is building
EUR/GBP: Holding within striking distance of the range topSupport S1: 0.8351: Reaction low /MTMA S2: 0.8330: LTMA/Reaction low S3: 3:0.8290/83 Reaction lows.
Resistance R1: 0.8406/10 Reaction highs R2: 0.8422 Range top R3: 0.8485: Previous reaction low
The pair is moving into overbought.
In December, the US trade deficit widened from a downwardly revised $47.1 billion to $48.8 billion, broadly in line with expectations. The trade deficit is again at the highest level in six months. The details show that imports rose by 1.3% M/M to the highest level since July 2008, while exports rose by a softer 0.7% M/M despite record sales of petroleum to overseas buyers. Excluding petroleum, the trade deficit widened from $19.4 billion to $21.9 billion. It is however difficult to assess which impact the data will have on fourth quarter GDP, as the monthly data were revised back to the beginning of 2011.
According to the preliminary estimate, University of Michigan consumer confidence weakened in February for the first time in six months. The headline index dropped from 75.0 to 72.5, while only a marginal decline was expected (to74.8). The deterioration in sentiment was led by the economic conditions sub-index, which dropped from 84.2 to 79.6. The economic outlook sub-index weakened only slightly, from 69.1 to 68.0. Inflation expectations show a mixed picture as 1-year ahead expectations dropped from 3.3% to 3.2%, while 5-year ahead inflation forecasts rose from 2.7% to 2.9%. After the sharp improvement over the previous months, it is no surprise to see a slight worsening in consumer mood, probably due to higher gasoline prices. We hope however that the index will resume its upward trend in the coming months as consumer confidence is still well below the LT average.
In December, Italian industrial production rose for a second consecutive month. On a monthly basis, production rose by 1.4% M/M, while the consensus was looking for a 0.5% M/M decline. The breakdown shows that strength was based in manufacturing (1.6% M/M), while mining & quarrying stabilized and electricity and gas dropped by 2.7% M/M. Looking at the details of the manufacturing sector, production of durable (3.0% M/M) and non-durable (1.6% M/M) consumer goods rose in December and also production of capital goods was strong (3.6% M/M), while output of intermediate goods stabilized. Italian production is now up for a second straight month, suggesting that not only in the core EMU counties, but also in the Southern Europe, the worst might be behind us. French data were however less optimistic. In France, industrial production dropped for the first time in three months, but twice as much as expected. Weakness was broad-based as manufacturing output (-1.4% M/M), construction (-6.6% M/M) and water and utilities (-2.5% M/M) all weakened in December. The overall euro zone reading is forecast to show a drop by 1.2% M/M, the fourth consecutive decline.
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