NEWS / Foreign Exchange

Writing letter(s)

• US Treasuries rebound on tame core CPI
• Consolidation phase started following strong rise in European yields?
• Writing letter(s)
• The comeback of inflation?

The EUR/USD pair again stands at new cycle highs at the 1.3580 zone.

The news flow of the day started well enough for the single currency, as the German ZEW survey showed improving sentiment for the fifth consecutive month! This had no material impact on FX. Everybody waited for the US data piece de resistance: inflation numbers in the afternoon.

The US CPI numbers showed some lessened inflationary pressures. This was not so much visible in the headline inflation, which came out at 2.8% Y/Y, in line with consensus, but the core CPI slowed from 2.7% Y/Y to 2.5% Y/Y. This implies that a potential rate cut would be possible, as the Fed also sees slowing economic conditions and core CPI recedes further.

Needless to say that this has dollar negative implications; the market did react in that fashion and a new up-gmove came about. The pair went for a test of the recent highs at the 1.3580 zone and moved briefly above; However no sustained break was made and things cooled down a bit towards the close at the 1.3570 zone.

This morning however we again find ourselves at the 1.3580 zone trying to move higher. The market really wants to go above 1.36 and take a sniff at the record highs. All of this confirms that the EUR/USD pair clearly is in an uptrend. This has inspired us for a buy-euro-on-dips approach over the past.

Now, as the 1.3660 record highs come within reach, some cautiousness may be called for. A break of the resistance at that area should be difficult (without any news flow today??¦) and could bring about a ST corrective move lower in the EUR/USD pair. However an upside bias is maintained for now for the longer term, as long as no proof of the inverse is brought.

USD/JPY declined sharply yesterday. The pair ticked down from the 119.60 zone to the 119 area. The bleeding didn??™t stop overnight, as this morning the pair even stands at the 118.60 zone.

The move, of course, was partly inspired by the US CPI numbers. As the core CPI turned down, this opened the road for rate cuts further out in the US. Rate differentials still have some meaning of course in this pair, as it is driven so much by carry traders. These carry traders probably will start looking elsewhere for new deals, for instance to GBP/JPY and EUR/JPY, as rates are still rising in the monetary areas.

Still, the yen is in no position, we feel, to drastically go the other way and strengthen in a sustainable fashion. This pair may be locked up in broad ranges, with the topside protected at the 122 area, but the downside also seems strong at the 116 zone. A move below that seems difficult as no rate hikes are seen in Japan over the next months, at least until after the Summer months (we give no credence to yesterday??™s rumours of a BoJ rate hike in the spring), and then still the eco data have to hold up better than they did recently??¦.

The EUR/GBP pair yesterday took a big step lower, as the sterling rebounded on the higher than expected inflation data. Indeed, the UK CPI rose above the 3% threshold, and this for the first time since the BoE took charge of monetary policy. This meant that governor King had to write an explanatory letter to the government. This is a psychological factor and implies that action now has to be taken. King doesn??™t want to write a letter every month??¦All attention will remain focused on a rate hike in the UK in the run-up to the May meeting (maybe even some speculation for a 50 basis points hike?) and this should continue to underpin sterling sentiment we feel. The downward spin is retained obviously for this pair.

It is a big day for sterling followers, with the UK data on payrolls and the BoE Minutes. If either of these can make the hawkish case, it will be taken up by the markets. Hawkish BoE comments especially would put oil on the fire and give more petrol for the sterling drive to re-found strength. Watch also Cable as it pierced above the psycho 2$ level and is testing the 26 year highs at 2.01??¦

We feel so much good news was always soaked up by the euro, but other sterling positive news had gone too long unnoticed. Now seems to be payback time. Technically, it is still important to break below the 0.6748, the recent reaction low, but as the pair is already below the neckline of a double tip formation with neckline at 0.6775; downward tone is already set for the EUR/GBP pair.