Euro was broadly pressured last week on growing concern of Greece's large deficits and doubts over its sovereign creditworthiness, in particular after ECB Trichet made it clear that there will not be any special treatment to a signal member of the Eurozone. Yen rose against most major currencies on risk aversion on as China stepped up its measures to cool lending. Sterling, on the other hand, was supported by speculations that BoE will let the asset purchase program expire in February. Dollar was initially pressured by risk appetite, but later rebounded strongly, with the help of weakness in Euro and crude oil.
As expected, the ECB meeting offered no surprise to the market on both economic outlook and monetary policy. The central bank kept the main refinancing rate at 1% and stated current interest rates are 'appropriate. Moreover, the Eurozone's economy will expand at a 'moderate' pace while inflation outlook remains subdued. Regarding the fiscal health of Greece, Trichet said it has a lot of hard work to do, and warned that no government, no state can expect from us any special treatment. Nevertheless, when talking about Greece's exit of Eurozone, Trichet said he wouldn't comment on an absurd hypothesis. Instead, Trichet said that ECB would carefully examine Greece's steps to slash the deficit over three years to below 3%.
Greece presented a three-year budget plan to EC that includes more than EUR 10 billion euro in deficit-reduction measures for this year budget shortfall. But markets are skeptical about the workability of the ambitious plan. German Chancellor Angela Merkel also said at a private forum that Greece's fiscal crisis poses a very difficult phase for the euro.
The Japanese yen was broadly higher last week on risk aversion, in particular against European majors. Also, the yen was supported by China's act to step up the measures to cool lending. China raised bill yields second time in a week to tightening liquidity further. PBoC sold benchmark 1-year bill at 1.8434% today. Last week, PBoC raised yield on three-month bills to 1.3684%. In addition, PBoC said it was raising reserve requirements ratio by 0.5 percent points which now clearly indicates that China is begging to tighten monetary policy.
Sterling, on the other hand, was supported by comments from BoE Sentance and was relatively firm during the week. BoE MPC committee member Andrew Sentance said in an interview with Guardian that at some point you have to say we have increased the amount of stimulus enough. It doesn't mean you are going to withdraw it but you don't have to keep adding to it. Also, he said that impact of oil and commodities prices, and sterling, on inflation need to be considered and the bank is approaching a point that need to hold back and wait and see how stimulus is flowing into the recovery. He also express his confidence that there is little risk of a double-dip recession in UK. The comments triggered speculation that BoE will let the asset purchase program expire in February.
Looking at the charts, despite a brief break, dollar index seemed to have drawn some support from 38.2% retracement of 74.19 to 78.45 at 76.82 and recovered. Friday's break of 77.30 minor resistance suggests that correction from 78.45 might have completed at 76.60 already. Initial bias is mildly on the upside for 78.19 resistance and break there will indicate that whole rise from 74.19 has resumed for 38.2% retracement of 89.62 to 74.19 at 80.08. However, a break of 76.60 support will suggest that correction from 78.45 is still in progress for 61.8% retracement at 61.8% retracement of 74.19 to 78.45 at 75.81 instead.
The Week Ahead
Euro is expected to remain broadly pressured this week. EUR/USD's corrective rise from 1.4217 might be completed at 1.4578 already and further fall should be seen to retest this support. EUR/JPY's rise from 127.50 should have be completed at 134.36 on a small head and shoulder top pattern and deeper fall should be seen to 126.88/127.50 support zone. EUR/GBP has also broken out of recent range to resume the decline from 0.9410.
Dollar was rather mixed last week and again, whether it could stage a sizeable rebound will depend on the development in commodities. Crude oil has already made a short term to at 83.95 last week and is set to have some more pull back this week. The focus will be on whether gold's recovery from 1075 has completed at 1163 last week. A break of near term support of 1120 will likely trigger some selling in gold to retest 1075 and thus give dollar a boost to has a broad based rally.
Another important focus will be on Sterling which was supported by BoE Sentance's comments. Some important data will be released this week, including CPI, employment and retail sales, together with BoE minutes. Main focus will be on whether these events would push the sterling further higher, or will they trigger a near term reversal in the pound.
- Tuesday: UK CPI; German ZEW; BoC rate decision; US TIC capital flow; NZ CPI
- Wednesday: UK job report, BoE minutes; Canada CPI, US new residential construction, PPI; NZ retail sales
- Thursday: Eurozone PMIs; Swiss ZEW; US Philly Fed index, Leading indicators
- Friday: UK retail sales; Canada retail sales
EUR/JPY Weekly Outlook
After edging higher to 134.36, EUR/JPY reversed and fell sharply to as low as 130.29. The development indicates that rise from 127.50 has completed at 134.36, ahead of 134.54 resistance on a small head and shoulder top pattern. Also, it suggests that recent price actions from 126.88 are merely consolidation to fall from 138.47 and should have completed too. Initial bias will remain on the downside this week and further decline should be seen to 126.88/127.50 support zone. On the upside, above 131.67 minor resistance will turn intraday bias neutral and bring consolidations. But recovery is expected to be limited well below 133.62 resistance and bring fall resumption.
In the bigger picture, EUR/JPY is still bounded in medium term range between 126.88 and 139.21 and outlook remains neutral for the moment. On the downside, a break of 126.88 support will revive that case that medium term rebound from 112.10 has completed at 139.21 already and down trend from 169.96 is resuming. In such case, we'd expect deeper fall to 112.10 and beyond to resume the long term down trend. On the upside, however, break of 134.54 resistance will revive that case that recent price actions are merely consolidations to medium term rise from 112.10 already and another high above 139.21 should be seen before EUR/JPY tops.
In the long term picture, up trend from 88.96 (00 low) has completed at 169.96 and made a long term top there. Subsequent price actions are either developing into resumption of the multi decade down trend from 285.56, or wide range corrective pattern. In either case, upside should be limited well below 169.96 high and we're expecting at least one more medium term fall after the current rise from 112.10 completes. The final structure of the rebound from 112.10 will provide more indication on whether a test on 88.96 low would be seen.