NEWS / Foreign Exchange

EUR/USD at crossroads

• Treasuries trading quietly ahead of FOMC
• Focus on UK Minutes following higher than expected CPI
• EUR/USD at crossroads
• Bernanke enters the game

Currencies: EUR/USD at crossroads

EUR/USD looked set to decline slightly during Tuesday??™s trading as some downward pressure was noted during the European session, with the pair dipping to the 1.3270 zone without any news. In the later hours of the session the euro did manage a comeback though putting it at day highs at the 1.3320 zone, where it is still at this morning.

This may highlight our concern that USD strength is now used as entry points for dollar bears. Looking back at the price action of these past months, it is visible that the dollar comeback seen at the onset of this year has now completely evaporated and the risk is again for a new upleg in this pair. The technical picture is close to a break-out, if the pair would move above the 1.3367 mark, the high of 2006. The market is clearly worried about this and a test could be on the cards.

That may be difficult though looking closer at the agenda. This evening??™s FOMC rate decision is an event that can set the tone either way. Especially the statement afterwards will be keenly discerned. Our main scenario is that quite logically the fed sticks to its tightening bias due to inflationary pressures, but becomes a bit dovish on the economy. That is largely expected, so impact could be not so big. It is a bit of a mixed bag for the dollar, as it keeps its rate support in place, while seeing an acknowledgement that all is not well on the economic front. But that??™s nothing new.

The surprise element could be the equity markets. These have been in a fragile state, despite recouping slightly over the past days in the US. If turmoil returns over there, it will be seen as a dollar negative, as the Fed is seen more eager to step in and help equity markets in case of panic. While at the same time, the ECB seems to be living more on an island. Take a look at ECB??™s Trichet today, as he testifies to the EU parliament in Brussels. More hawkish talk is to be expected.

To conclude, looking at strategy, we feel a sell-USD-into-strength atmosphere for this pair is still in place.

The BOJ report and Fukui??™s comments yesterday morning showed that a next rate hike in Japan is quite some way off, but this didn??™t surprise the market. The yen shrugged it off, as USD/JPY barely ticked up in the following hours.

Yesterday a rumour instigated by a PBOC official, who said that China would no longer be accumulating USD reserves, spurred some dollar softness in USD/Asia and in USD/JPY. The pair went lower from the 117.60 zone to the 117 area on this.

USD/JPY has been moving in a range recently. We see this sideways pattern between the lows at 115.16 and the highs at 118.51 still in place and preferred for now. The equity markets apparently still are used as driver, with the US equity marketturmoil calming down. Only a break outside these above mentioned USD/JPY ranges would signal a new direction medium term.

We still have some deeper concerns for the USD, as economic data are a bit softer. This should prevent the USD to revisit the recent highs and could install a sense of sell-USD-into-strength. We must adhere to caution for the dollar. A break above 118.51 though would signal improvement and should make yen longs stoploss.

A break to either side looks very difficult ahead of the FOMC (see above for details), where the tone could be set for days to come.

EUR/GBP nosedived sharply yesterday, as the UK CPI unexpectedly ticked up to 2.8% Y/Y. EUR/GBP quickly went form the 0.6830 zone to the 0.6770 zone.

BoE??™s Barker seemed to be pouring oil on the fire, saying that ???it seems likely that there is a little more upward inflation pressure in the short-term than might have been expected??™, signalling an element of surprise, which could affect BoE policy makers??™ thoughts.

Yesterday??™s price action clearly demonstrated our belief in a sterling comeback. This can go on as the market still needs more reassessment of the situation and EUR/GBP unwinds overbought conditions. EUR/GBP is now also below the neckline of a double top formation at 0.6818 (see technicals).

We feel the forex market was too much focused o the ECB hawkishness of late, while underestimating the BoE rate hike chances. This called for an adjustment towards the situation on the fixed income market.