Euro extends rebound
February 20, 2008 – 5:26 amby KBC Market Research Desk
On Tuesday, the euro extended its rise against the dollar. The trend was already in place since early last week and in the absence of key economic data the move was extended. The ECB (Noyer) still being rather optimist on the European economy going into 2008 might have been slightly euro supportive and this also was the case for the positive market sentiment that reigned on the stock markets, at least in the early hours of trading. However, later in US trading the euro (and stocks) clearly lost momentum and EUR/USD closed the day at 1.4725, still a decent gain compared to the 1.4657 close on Monday.
Today, the calendar heats up with the US CPI and the housing starts in the picture. With oil close to USD 100 a barrel, the CPI data will receive all market attention However, the question is what the dollar reaction should be on a higher than expected inflation figure (if it were to occur) as such an outcome would be a highly ambiguous sign for the US economy. Of course, the market scaling back Fed rate cut expectations gives the dollar some interest ‘support’ but also delays the prospect for a rebound of the US economy. However, as renewed inflation fears probably will also weigh on the stock markets, this might at least hamper the recent euro rebound. In a longer-term perspective, we hold on to our view that that it’s too early to turn dollar positive as long as the visibility on the US economy remains non-existent. However, in a day-to-day perspective the EUR/USD rebound might shift into a lower gear today.
Looking at the graphs, EUR/USD dropped sharply two weeks ago, but returned to the middle of the 1.4310/1.4968 trading range. In a longer term perspective, the EUR/USD picture remains euro constructive as long as the medium-term low in the 1.43-area holds while short-term the correction low at 1.4440 gives intermediate support. We maintain our buy EUR/USD on dips approach for return action higher in the range, even if a test of the range top (1.4968) will be difficult, too. As EUR/USD already trades above the middle of the established range, there is no hurry at all to add to EUR/USD longs at current levels.
On Tuesday, EUR/GBP extended the up-move that started and the end of last week as sterling remained in the defensive after the turmoil with respect to the nationalisation of Northern Rock. EUR/GBP set an intraday high in the 0.7570 area around noon. Later in the session some consolidation kicked in. A speech of BOE’s Barker (rather dovish) had no impact on sterling trading. EUR/GBP closed the session at 0.7557 compared to a 0.7506 close on Monday. Overnight, the pair lost some ground on an overall softer euro.
Today, the UK calendar contains the Public sector borrowing data, the M4 money supply data and the CBI industrial trends survey for February. The latter probably has the most market moving potential.
Looking at the graphs, the previous downward correction in EUR/GBP halted ahead of the key 0.7389 support. An attempt to break the top of the sideways range failed early February, but succeeded earlier this week. As a result, the picture is again upwardly oriented in this pair. A slowing in the overall euro momentum shortterm might also leave its traces on EUR/GBP trading, but we continue to see this as a buy-on-dips environment with the 0.7614 range top the first next target. We don’t see any reason to turn sterling positive in an environment of ongoing high global market uncertainty.
