FX Morning update - Euro continues to wilt while Sterling retains its gains

By Michael Hewson

Date: Thursday 18 Mar 2010

Tuesday’s dovish statement by the FOMC put the US dollar under pressure yesterday with sterling being one of the main beneficiaries. The pound was also helped by better than expected employment data with the unemployment rate showing its biggest fall since November 1997 to 4.9%.

The release of UK public finance data today will re-focus the markets attention on the state of the UK’s finances, with the market expecting a monthly figure of around £14bn, which should make for extremely choppy trading over the next few days, and limit upside sterling potential, as we look towards next weeks budget.

The pound rose against both the dollar and the Euro as it looked to squeeze the record short positions that have been accumulated in sterling over the last few weeks. The sterling rate index broke above its 2 week highs of 77.43, touching 77.85, while cable hit 1.5385 and EURGBP fell below 0.9000.

Yesterday afternoon's US PPI figure showed that inflation is currently not a concern for the moment, and reinforces last nights Fed decision to leave rates low for an "extended period". The dollar has managed to regain some ground, however as concerns about further Chinese fiscal tightening and sovereign debt problems in Europe returns to the forefront of the markets thinking. The Euro made a rather feeble attempt to get past the barrier above the 1.3800 area yesterday, but was unable to gain any impetus as the market looks to see past the "smoke and mirrors" of political rhetoric surrounding a bail-out plan for Greece.

With conflicting signals continuing to come out of Europe it appears that the policy of constructive ambiguity that has managed to slow the Euros recent falls could be about to unravel. Greece has threatened to go to the IMF unless European ministers come up with some rescue package at the meeting on the 25th March, while a German finance official suggested Greece may be better off doing just that. This remark suggests that all is not well between Germany and the rest of the Euro zone with respect to Greece.

EURUSD - US dollar weakness initially pushed the Euro above 1.3800 briefly earlier yesterday morning; however the Euro gains proved short-lived after failing momentum pushed it back down again, from highs of 1.3816.
A move and close above 1.3800 is still needed to precipitate a move towards 1.4000. We should also keep an eye on the 50 day MA at 1.3870 if a break does occur as this could also stall any rally.
The market needs to break back below the support at 1.3710/20 to re-test this weeks low at 1.3640, and trend line support at 1.3660, from the lows around 1.3430.
The key downside support remains at 1.3485 on a daily close, with interim support around 1.3710/20.

GBPUSD – yesterday’s positive unemployment figures built on Tuesday night’s sterling gains, hitting highs of 1.5380/85, just short of trend line resistance at 1.5390, from the 1.6460 January highs. There is also resistance at 1.5420 which is 38.2% retracement from the January highs to the March lows at 1.4780. However public finance and money supply data due to be released later today could well see sterling drift back down again, if it turns out to worse than forecast.
Trend line support from the lows at 1.4780 comes in at 1.4950, while the key downside level on the cable remains at 1.4850, the 61.8% retracement of the up move from 1.3500 to the highs at 1.7045. A break below here would re-target 1.4400, the 22nd April 2009 lows.

EURGBP – the Euro dropped through the support at 0.9020, after yesterday’s positive sterling numbers. Unable to regain 0.9000 it has continued to remain under pressure, breaking below yesterdays low at 0.8953, and heading towards 0.8900. The triple highs at 0.9150 remain the key barriers to further Euro upside here.

USDJPY – the yen has been pretty much sidelined today unable to make much in the way of gains after Tuesday nights Bank of Japan meeting saw the bank extend its bank lending program making credit more easily available.
This action was supposed to have weakened the yen, pushing the dollar higher but the yen still seems pretty strong, and continues to drift away from yesterday’s highs at 90.70/75. Yen repatriation by Japanese exporters still appears to be weighing for now. A slide below 90.20 could see a drift down towards 89.80 which is now the bottom of the cloud, and maybe even 89.30. Any rallies to the upside should continue to be capped while the highs around 91.15 and the 200 day moving average at 91.75 weigh on the market.

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