Daily Forex Commentary

Majors: Japanese economic growth data beat expectations of an increase in year to date GDP to around 3.5% coming in at a whopping 4.6% during Q4 2009. The weak Yen helped exports and with improvements in global demand mainly led by China also playing a big role growth in the region beat economist forecasts. Despite the positive news the JPY weakened against the USD trading to 90.20 in Asian trade as many analysts expect the rise in GDP to be relatively short lived. With little in the way of offshore economic data for direction overnight it emerged that the Greece finance ministry had entered into interest rate swaps as a means to defer interest payments by several years, a common practice however one that cast some doubt as to the true debt burden. The news hit risk appetite with EUR/USD trading to a low of 1.3580 on two occasions, down from its overnight peak around 1.3635. With the U.S scheduled back from a long weekend this evening and more comments from EU officials likely to emerge the volatility is expected to increase once again as EUR/USD continues to edge closer to 1.35.

Candlestick Summary - EUR/USD

We initially sold EURUSD at 1.4881. Prices are have stalled near our fourth revised profit target, finding support at the bottom of a falling channel established from the swing high in early December. Positive RSI divergence hints that an upswing to the channel top just above the 1.40 level is likely from here. We see this as corrective and will remain short, revising our profit target slightly lower to 1.3651 with a close below that level signaling the next leg of the down move. A stop-loss will be activated on a daily close above 1.4251.

Bias: Bearish

Elliott Wave Bias Chart - EUR/USD

The EURUSD decline below 13584 gives credence to my argument that the pair is in “a 3rd of a 3rd wave…an objective is 13081 (161.8% extension).”  Keep risk at 13842 and 13700 should provide resistance if needed.  Use the unorthodox channel as a point of reference.  Price is now below the midpoint of the channel, which is bearish.

Free signal EUR/USD, 15 Februar 2010

Symbol:
EURUSD
Forecast High:
1.3771
Forecast Low:
1.3457
Entry Buy:
1.3626
T/P Buy:
1.3673
S/L Buy:
1.3576

Greek Saga Won't Kill The Euro But The End May Begin Here

Could the endgame of this Greek tragedy be a eurozone break-up? The single currency's supporters maintain that such an outcome is mere mythology.

 
Greece accounts for only 3pc of the 16 member states' combined GDP, they say, and has lower debts than some of the banks bailed-out during sub-prime. A loan of €20bn (£17.5bn) would do the trick, we're told. That's less than the British government injected into either Lloyds or the Royal Bank of Scotland.

Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That's because, at the heart of the eurozone project there was always a fundamental contradiction – one that the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.

While the European Central Bank controls eurozone interest rates and the money supply, the size of each country's fiscal deficit results from the spending and taxation decisions of its own sovereign government.

How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can't – not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.

Voters don't like that. Neither do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently "pro-European" lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That's why the eurozone will ultimately break-up – whether Greece is bailed out or not.

The eurocrats blame "speculators" for the single currency's woes. That's a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country's electorate bursts through. This current Greek saga won't end the eurozone – but future historians will identify it, perhaps, as the beginning of the end.

Many have said it's hardly surprising that Greece e_SEnD with its history of financial profligacy and capital flight e_SEnD has emerged as the eurozone's Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they'd be mad, but it must be their choice.

If Berlin and Brussels try to impose their own view on Greece and the "cuts" come from outside, the situation will become absolutely incendiary. Protests will turn into fully-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?

Greece is running a budget deficit of 12.7pc of GDP. The real number could be 15pc or more as Greek politicians have lied for years about the extent of their country's liabilities. They're not the first European leaders to do so and they won't be the last. But Greece was, almost uniquely, assisted in its fiscal cover-up by Brussels – with the usual "convergence criteria" being bent to allow Greek euro entry.

As recently as September 2008, the euro seemed to be going well, despite the massive variation between member states. The five-year Greek credit default swap spread was less than 50 basis points. In other words, buying insurance against Greece reneging on its sovereign debt cost only slightly more than insuring German government bonds. Those, such as this columnist, who continued to warn that the eurozone was "dangerous and inherently unstable" were dismissed as cranks, xenophobes or worse.

Then sub-prime hit in earnest. Insuring against Greek default suddenly became a lot more expensive, the CDS spread rising six-fold in eight weeks. The same risk measure is now around 400 basis points, the cost of insuring against Greek default no less than 20 times higher than it was in January 2008. Default risks are growing in Portugal and Spain too, the eurozone's fourth biggest economy.
The problem is that default dangers in Greece – where €20bn of debt falls due in April and May – are making creditors think twice about lending to other cash-strapped governments. Even if Greece avoids default, this latest crisis means governments everywhere will have to pay more for their finance, which in turn will push up borrowing costs for everyone – right across the eurozone and beyond, including in the UK. This is so-called "contagion".

The Greek government has been desperately trying to convince the rest of the world – the Germans in particular – that it will keep its promise to reduce the deficit in its still-shrinking economy to 8.7pc of GDP next year and less than 3pc by 2012. Yet this would amount to the most severe fiscal contraction in the history of modern Europe. It simply won't happen.

The reality is that Greece has two choices – both disastrous for the eurozone. One is to default, leave the euro and re-establish the drachma at a rate low enough to stimulate exports and growth. To write this is heresy. But with general strikes now in the offing, and the Greek public-sector unions resurgent, such a scenario is possible.

For years, the ECB has set rates low to suit France and Germany. This has made life difficult, causing dangerous debt bubbles, in smaller and more inflation-prone eurozone members. Were Greece to take the exit route, the governments of several other single currency members would come under intense pressure to do the same.

The eurozone's vital cohesion would be seriously undermined. Its ultimate break-up - or, at least shrinkage to a Franco-German rump - would only be a matter of time.
The other, more likely, option is that Greece accepts a German-led bail-out and "muddles through". But even that would spark an eventual eurozone split. On extending assistance, Berlin and Brussels would talk tough and Greece would promise to behave. Anything less wouldn't be tolerated by German voters. After the horrors of inter-war hyperinflation, Germany has spent more than 50 years building policy credibility. Backing a Greek bail-out would be a massive step – the first time in decades Germany has departed from its fiscal and monetary hard line.

Yet the German government will do it. Refusing to bail-out Greece would risk being labelled "bad Europeans" – something anathema to Germany's post-war elite. Berlin also has a massive financial stake in the euro's status as the world's second most-used reserve currency.

Although Greece will be presented as a one-off e_SEnD a "very exceptional" case e_SEnD once that line has been crossed there is no going back. Other eurozone countries will want a bail-out. Why should Portuguese, Estonian or Spanish workers endure austerity and unemployment, while those in Greece were spared? Why them and not us? If big banks can compete for bail-outs, walking the line of "moral hazard", political leaders will do so too. A Greek rescue by the Germans would spark repeated bail-outs.

In the end, voters in the big eurozone economies, faced with their own fiscal problems will say enough is enough. Europe's monetary union will collapse, just like every other currency union in the history of man. The exception is America – yet the US, as the eurocrats hate to acknowledge, had been through a century and a half of political union before the Federal Reserve was founded in 1913.

That's the key difference. America is a political union, with a system of explicit inter-regional fiscal transfers, and the eurozone isn't. That's why the single currency will ultimately split and be exposed as what it is – a triumph of European hubris and political vanity over unavoidable economic logic.

• Liam Halligan is chief economist at Prosperity Capital Management

EUR/USD: Threats To Downside With Eyes On 1.3584/30 Levels

EURUSD: The pair may have closed the week almost flat and printing a hammer candle on the daily chart but while it holds below its Feb 09’10 high/Feb 01’10 low at 1.3838/51 and the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high, we see risk to the downside. With that said, the pair retains its broader weakness activated from its 2009 high at 1.5143 and should push towards the 1.3584/30 levels where a break will clear the way for the resumption of its medium term downtrend towards its .61 Fib Ret/May 18’09 low at 1.3422/09 and then its Jun 03’09 low at 1.3211.Its weekly RSI is bearish and pointing lower supporting this view. However, the immediate risk to our analysis will be its Friday hammer print triggering a corrective recovery higher which should target its Feb 10’10 level at 1.3675 at first with a cut through there exposing its Feb 09’10 high/Feb 01’10 low at 1.3838/51. We expect a reversal of roles at this key resistance zone capping further upside gains and turning the pair back down again. Above the latter level if seen will bring the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high into focus.

Weekly Chart: EURUSD

Can Anyone Fix The Euro Puzzle?

A crisis-strewn week has left the single currency on the edge of a precipice, write Edmund Conway and Bruno Waterfield
 
The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours.

It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.

By now, the story will be painfully familiar. The southern European nation was having trouble raising money. Never the most sensibly-run economy, Greece had seen its budget deficit balloon to terrifying proportions in the wake of the recession sparked by the financial crisis. To make matters worse, the incoming government, led by Prime Minister George Papandreou, had uncovered the fact that their predecessors had hidden billions of euros worth of borrowing outside their official statistics. The combined effect was to cause a sudden sharp increase in the country's borrowing rates and its default insurance spreads, as investors speculated that it was entering a fiscal debt trap from which it could no longer escape.

In such circumstances, a country would devalue its currency, but this is not an avenue open to a member of the euro like Greece. With investors pulling their money out of the country at such a rapid rate that the interest rate spread between Greek and German government bonds hit its highest level since the creation of the euro, it became clear that someone was going to have to step in and help.
It wasn't merely that Greece, a relatively small economy, was close to collapse; it was that, left unchecked, the panic could spread to Spain, Portugal, Italy or Ireland – all of whom suffer the same ballooning budget deficits and overburdened consumers.

For a whole swathe of euro members to be allowed to crumble would beg questions about the entire euro project. Indeed, as Papandreou pointed out at the World Economic Forum at Davos last month, the attack could be seen as a speculative assault on the euro, targeted at first through its "weakest link". As if to bear out his point, figures from the Chicago Mercantile Exchange released on Monday indicated that speculators had amassed their biggest positions against the currency since its foundation more than a decade ago.

So it was that a week before Thursday's summit, in a bilateral meeting in Paris, Sarkozy told Merkel that France and Germany would have to mastermind some kind of plan to protect Greece. His broad proposal was that the northern European nations should at the least issue a statement promising to stand behind Greece, and perhaps go so far as to spell out how much they would put into a potential lifeboat. Merkel was not convinced. For one thing, she was well aware that Sarkozy had his own political motivations for such a move: the alternative, an International Monetary Fund (IMF) bail-out, would enable IMF chief Dominique Strauss-Kahn, Sarkozy's most likely opponent at the next French election, to ride in and "save the euro".
 
But, more fundamentally, by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece's lead. Moreover, under the German constitution, such moves were legally tricky to organise.
And so the battlelines were drawn prior to a week of frantic behind-the-scenes negotiations as the French and Germans tried desperately to find common ground.

Finally, it seemed as if the ministers had patched together a deal. Some kind of bail-out package – a "firewall" provided by a "coalition of the willing", according to insiders – would be revealed at the summit.

Then came van Rompuy's excuse about the snow. But it wasn't ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," before adding: "The Greek government has not requested any financial support."

The hope was that the statement alone would be enough to reassure markets that in the event of a proper "sudden stop" in funding to Greece, the rest of the euro area would step in. However, the financial crisis has proven that without concerted plans to back them up, statements of broad intent are pretty useless at containing market concerns.

Within moments of the statement, the euro dropped to a nine-month low against the dollar and share prices in the euro area stalled. The rot continued on Friday and, according to economists, will persist unless finance ministers meeting tomorrow provide any detail on what a rescue package might involve.
What makes any hopes for clarity appear forlorn is that the euro has no mechanism for dealing with crises of this sort. It is monetary rather than fiscal union. As Martin Feldstein, a Harvard professor, puts it: "There's too much incentive for countries to run up big deficits as there's no feedback until a crisis."

The ECB could offer the country extra liquidity support, but there is a sense that unless other euro nations dip into their pockets the suspicions over Greece will linger – and those about the rest of the euro's debt recidivists. Juncker's plan would involve a web of bilateral loans from euro members, perhaps being made not directly but through state-owned banks, so as to circumvent those German constitutional obstacles.

However, it is an open question as to how the populations of those donor countries will take the proposal that they once again come to the rescue of their misbehaving neighbours. Nor indeed how the Greeks will take it when it emerges that their coruscating deficit cuts and public sector wage cuts are being overseen by the Germans. Although the political will is clearly still strong in Brussels to fight off any talk about a euro crisis, it is clear even to fans of the single currency that this is its single greatest test. According to Albert Edwards of Société Générale (himself not, it should be pointed out, a fan), "any 'help' given to Greece merely delays the inevitable break-up of the eurozone". The problem, he adds, is a "lack of competitiveness within the eurozone – an inevitable consequence of the one-size-fits-all interest rate policy.

"Even if the PIGS [Portugal, Ireland, Greece and Spain] could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative [and probably absolute] deflation."
This problem – that under eurozone rules Germany is able to pursue an entirely divergent economic strategy to its Mediterranean counterparts – suggests that the best course of action may be for Germany to pull out of the currency union, according to former Bank of England policymaker David Blanchflower.

"That might be the only solution," he says. "At the moment it simply isn't working. And the imbalance makes it almost impossible for countries like Greece or Ireland to escape from this situation."
It is not merely economists who have clocked on to this inherent weakness. According to Simon Derrick, of Bank of New York Mellon, the mood among investors feels not dissimilar to the time the Exchange Rate Mechanism faced speculative attack in the early 1990s.
Back then the targets were currencies; this time they are government bonds. But the objective is the same – to test whether governments really have the political will to persevere with a system plagued by inherent economic weakness and illogicality.

Has any hedge fund put its head above the parapet in this destructive trade, as George Soros did back then, owning up to shorting the pound before successfully "breaking" the Bank of England? Not yet, though the rumours are that John Paulson, the man who made billions betting against the US housing market, has significant positions against some of the weaker euro members. But a currency union is rather more difficult to break than an exchange rate agreement. Betting against the Europeans' political will to further integration remains a gamble.

Still, the difficulties have at least offered Gordon Brown a rare opportunity for genuine self-satisfaction. After all, he decided in 2003 – against Tony Blair's wishes – not to join the single currency, and only now is it clear how wise that decision was. Britain, though marred with similar fiscal difficulties as Greece, has at least had the luxury of being able to devalue the pound.
Business Secretary Lord Mandelson, the arch europhile, still clings on to the dream, saying last week: "I think in the longer term it would be in Britain's interests to be part of the eurozone."
Even with sterling, the UK can hardly rest easy. For one thing, British banks have a large balance sheet exposure to the troubled Club Med nations – estimated by the Bank for International Settlements to be around £240bn – so any collapse there would trigger a secondary crisis in London.
Second, the Greek crisis serves as a reminder that no country is immune to a sudden investor exodus. And if one runs one's finger down the list of leading nations, no prizes for guessing which country has a Greek-style combination of rocketing budget deficits, high current account shortfalls and rising national debt.

EUR/USD: Weak Tone With Eyes On 1.3584/30 Levels

EUR/USD: The pair remains firmly biased to the downside short and medium terms as it continues to target lower prices following its rejection of corrective high at 1.3838 level the past week. As referenced in our past reports, we have our eyes on the downside while EUR trades and holds below its Feb 09’10 high/Feb 01’10 low at 1.3838/51 and the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high. Despite its Friday print of a hammer candle (bottom reversal signal) and an almost flat weekly close, the pair retains its broader weakness activated from its 2009 high at 1.5143. In that case, below the 1.3584/30 levels will clear the way for the resumption of its medium term downtrend towards its .61 Fib Ret/May 18’09 low at 1.3422/09 and then its Jun 03’09 low at 1.3211.Its higher level chart studies are bearish and pointing lower supporting this view. However, the immediate risk to our analysis will be its Friday hammer print triggering a corrective recovery higher which could target its Feb 10’10 level at 1.3675 with a cut through there exposing its Feb 09’10 high/Feb 01’10 low at 1.3838/51. We expect a reversal of roles at these key resistance area capping further upside gains and turning the pair back down again, which is consistent with its broader medium term bearishness. Above the latter level if seen will bring the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high into focus. On the whole, EUR continues to retain its medium term bearish structure as it looks to weaken further below the 1.3584/30 levels.

EUR/USD - Long Term Market Analysis

EURUSD remains in downtrend from 1.4579. As long as 1.3838 resistance holds, downtrend could be expected to continue and deeper decline to 1.3400 area to reach next cycle bottom on daily chart is possible next week. However, next cycle bottom is nearing, a break above 1.3838 key resistance will confirm that a cycle bottom has been formed and the fall from 1.4579 has completed.

For long term analysis, EURUSD has formed a cycle top at 1.5144 level on weekly chart. Fall towards 1.3000 area to reach next cycle bottom is expected in next several weeks.

European Morning Wrap: USD, JPY Firm on Heightened Risk Aversion

• China’s central bank raises reserve requirements by 0.5%
• Swiss National Bank intervenes in EUR/CHF over EBS as cross hits session low 1.4637
• Euro zone Q-4 GDP +0.1% q/q, weaker than median forecast +0.3%
• ECB’s Trichet: Will work with European Commission on proposals for additional Greek measures
• ECB’s Stark: A lot of ideas being discussed for Greece are counterproductive
• French Q-4 GDP +0.6% q/q, slightly stronger than median forecast +0.5%
• Italian Q–4 GDP -0,2% q/q, weaker than median forecast +0.1%
• Germany Q-4 GDP flat q/q, weaker than median forecast +0.2%

The USD and JPY have seen general strength this morning against the backdrop of heightened risk aversion. The move by China to raise the reserve requirements by 0.5% caught the market on the hop.  European stocks have given up decent gains, oil is off over 1 1/2  bucks and gold has been hit hard.
EUR/USD started around 1.3665 and initially edged higher but the rally soon ran out of steam. Sell orders were tipped up at 1.3700/20 and they were never seriously threatened. Ongoing concerns over Greece and the EU’s ability to address the situation are never far from the surface and some weak German and Italian Q-4 GDP data helped to put the pairing under pressure.

The coup de grace came in the form of a triple-whammy, when around 10:00 GMT we first had the news China had raised reserve requirements 0.5%, quickly followed by disappointing euro zone GDP and industrial production data. There was no recovery from that and we’re presently down at 1.3540.
Cable is down at 1.5600 from an early 1.5695 having traded as high as 1.5740 and as low as 1.5584. It’s been that sort of morning. EUR/GBP is down at .8675 from early .8705, with two clearers seen notable sellers today.

USD/JPY having started around 89.70 rallied strongly over 90.00 to reach session high 90.35 only to do a sharp about turn, presently back 89.95 as the jpy saw across the board improvement as risk aversion rose in wake of China’s move.

EUR/CHF little changed at 1.4650. However inbetween we’ve experienced a healthy 1.4637-1.4693 range. The pairing iniitally sold off only to run into SNB intervention. The central bank is said to have intervened over EBS causing a brutal spike higher before falling back.
Bad morning for aussie, AUD/USD down at .8793 from early .8891. Not surprisingly aussie took it on the chin when the China news hit the wires.

Free signal EUR/USD

 

Symbol: 

EURUSD

Forecast High: 

1.3896

Forecast Low: 

1.3492

Entry Buy: 

1.3700

T/P Buy: 

1.3772

S/L Buy: 

1.3650

DAILY ANALYSIS FOR EUR/USD

Resistance:	1.3697,	1.3736-66,	1.3799,	1.3838-83
Support:	1.3650,	1.3618	1.3585,	1.3548

Bias: The 1.3697-05 resistance is the key pivotal point here - if this breaks expect a strong rally - else look for new lows. Please read the attached PDF file which provides more detailed analysis

Daily Bullish

While the rush back down to 1.3595 has potential to extend losses I am not so certain. There is support at 1.3650-55 and if the 1.3697-05 resistance breaks expect a sustained rally. This should quickly rally back above 1.3436-66 and 1.3799 and back to around the 1.3838 high. This may well provide a temporary stalling point but overall, depending on how quickly this develops I will be looking for extension to 1.3883 at least. The next larger targets are at 1.3945 and 1.4004.

Medium Term Bullish 8th February:    While medium term momentum looks so bearish I'd rather hold off from a bullish stance until the 124.60-92, 125.81 and 126.69 resistance levels are broken.

Daily Bearish

The upside failure almost looks certain to follow-through below 1.3585 but I would recommend waiting. Until the 1.3585-95 lows break there is still a question mark over this decline. If seen then look for extension to 1.3517. Cautiously I feel this will hold for a correction higher. While it remains below the 1.3580-00 resistance then look for eventual extension to the 1.3433 area minimum and on a strong extension to 1.3398.

Medium Term Bearish 12th February:   While the 1.3866-83 area can cap we cannot ignore the bearish threat. From this area a move back lower could easily retest the 1.3585 low and then extend to the original target at 1.3433-70 and possibly 1.3398. However, this now looks a stronger support for a larger reversal.

EUR/USD - Daily technical outlook

Trading strategy: small short at 1.3770, stop at 1.3820(0.5% risk), objective at 1.3710
The euro missed its chance to breach above the $1.38 handle and collapsed, re-testing the 1.3585/00 support region. Although it found bids and recovered half of yesterday’s initial losses – downside remains in focus for now. Next upside barriers are formed at 1.3700 by the 50% retracement of yesterday’s full downward move, followed by 1.3720 and 1.3750/60. Higher comes the 1.3800 handle and recent top at 1.3840 which seems too far up. Short term sentiment remains bearish as long as upside will be capped by the 1.3860-1.39 resistance region. Intra-day sentiment is negative too and an extension of current recovery will probably face fresh selling within the 1.3750-1.38 intra-day resistance range. Current quote is 1.3682 @07:00 GMT

Support: 1.3650, 1.3585/00 and 1.3500
Resistance: 1.3700, 1.3720, 1.3750/60 and 1.3800.
Market sentiment: long term – bullish, medium term – bearish, short term – bearish, intra-day – bearish

INTRA-DAY EUR/USD

Range Forecast
1.3670 / 1.3695

Resistance/Support
R: 1.3695/1.3726/1.3746
S: 1.3643/1.3621/1.3595

Euro Remained Prone To Volatile Trading

The Euro remained prone to volatile trading on Wednesday as market sentiment fluctuated sharply. There was selling pressure above the 1.38 level in European trading and the currency then dipped sharply to lows below 1.37 in New York.

There were renewed doubts whether a credible budget-support package for Greece could be put together and underlying stresses continued to undermine confidence in the Euro. There were also fears that any relief measures for Greece would undermine the medium-term commitment to budget stability and weaken underlying Euro support. Thursday’s EU meeting to discuss the situation will inevitably be watched very closely and failure to agree a package would tend to put the Euro under renewed selling pressure. Any support measures may also provide only limited currency support given the medium-term reservations.

The dollar was hampered initially by a larger than expected trade deficit of US$40.2bn for December as oil imports rose strongly. The wider deficit will tend to trigger a downward revision to fourth-quarter GDP data, although the impact may prove limited.

In contrast, there was initial dollar support from Fed Chairman Bernanke’s testimony as he suggested that the Fed would need to increase the discount rate soon to help normalise market conditions. The remarks triggered increased expectations of a near-term policy tightening which boosted the US currency. Bernanke also stated that rates would need to stay low for a protracted period which dampened support for the dollar and the Euro found firm buying support below the 1.37 level.

Risk appetite improved in the Asian session on Thursday which pushed the Euro back towards the 1.3790 region in choppy trading conditions.

 

Yen

The dollar dipped sharply to lows near 89.25 against the yen during US trading on Wednesday before finding support. The Japanese currency was unable to sustain the advance and the US currency was able to re-test resistance levels above 90 in Asian trading on Thursday.

Immediate yen demand was stifled by an improvement in risk appetite following stronger than expected Australian employment data and a higher than expected figure for Chinese new loans.

Trends in risk appetite will remain very important for the yen in the short term with the currency still likely to derive support from unease over US and Euro-zone fundamentals.

Sterling 

Sterling pushed above 1.57 against the dollar in early Europe on Wednesday following stronger than expected industrial production data.

The UK currency was unable to hold this level and was subjected to renewed selling pressure following the Bank of England inflation report. There was a slight downgrading of GDP growth forecasts within the data while the bank also expected inflation to fall back sharply to below 1.0% in the medium term from an initial peak above 3.0%.

The comments resulted in a downgrading of interest rate expectations which undermined the UK currency while there were also some fears that the bank was being complacent over medium-term inflation risks.

Sterling dipped to lows near 1.5570 against the dollar before finding some support with the currency bolstered by a general improvement in global risk appetite. Underlying confidence is still likely to be very fragile in the short term as underlying government-debt fears persist with further speculation surrounding a credit rating downgrade likely to be a continuing feature.

Swiss franc

From lows near 1.0620 on Wednesday, the US currency strengthened sharply to highs around 1.0720, but it was unable to sustain the advance and retreated back towards 1.0620 on Thursday. Although the Euro was able to find support above 1.4650 against the franc, it was unable to make significant headway.

The franc will tend to lose some defensive support if there is a credible support package for Greece or a sustained improvement in global risk appetite, although the underlying risks suggest that a mood of caution will tend to dominate which will curb any selling pressure on the Swiss currency.

Australian dollar

The Australian currency found support above 0.87 against the US currency on Wednesday and consolidated above the 0.8750 level as risk appetite was generally stronger.

The latest employment data was much stronger than expected with an increase in employment of over 50,000 for January while unemployment declined to 5.3% from 5.5%. The data reinforced expectations that the Reserve Bank would move to increase interest rates again and the Australian dollar moved sharply higher to a peak above 0.8880 as risk appetite was also firmer.