EUR/USD: Euro extends to high of around 1.3877

On Thursday, EUR/USD continued to build on the ‘positive’ momentum that was already visible over the previous days. The short squeeze was extended and EUR/USD went for a retest of the 1.3837 previous high, closing at 1.3877.

The news flow was not extremely positive, but EUR/USD traders again saw the glass half full rather than half empty. Especially the coordinated action of central banks to provide banks with dollar liquidity boosted morale. It indeed shows that central banks won’t stay aside when liquidity problems are threatening financial markets. Of course, it doesn’t resolve the underlying problems in financial markets and in European government debt markets. It is a measure that buys time and should be followed by other measures.

There are still unknowns about the measure itself, notably the price banks will have to pay for the liquidity. If it is too high, it won’t be of great help and banks might shun the facility, just as is the case with the seven-day dollar facility that already exists. However, markets had become very risk averse in the past weeks and were looking for some positive trigger. They got already some positive news in the past days and the dollar-liquidity initiative together with US Treasury Geithner participating in the Eurogroup/Ecofin meetings incited market participants to favour more risk appetite, resulting in equity and EUR/USD gains.

EUR/USD traded in the 1.3700 area at the start of the European trading session. Asian investors were rather cautious to join the rebound of the equity markets in Europe and the US on Tuesday. However, Europe remained optimistic. Investors apparently grew more confident that Greece would get the next tranche of the first aid package and this view was supported by comments from EU’s Rehn. So, EUR/USD and the European equity markets started another up-leg.

The Spanish bond auction was better received than the bond sale of Italy earlier this week. This also eased the short-term tensions on the EMU debt crisis. The EC indicated that growth in the second half of 2011 might come to a standstill, but this was no surprise for markets anymore. EUR/USD met offers in the 1.3825 area around noon in Europe.

From there, the focus gradually turned to US economic data. The US data were not really inspiring as inflation was higher than expected while the activity data disappointed (claims, Empire state). The mid-morning data were soon forgotten. However, at 15.00 CET the ECB announced that it will hold dollar liquidity operations in Q4 in co-ordination with the Fed, the BoE, SNB and the BOJ. This triggered a rally in riskier assets and EUR/USD broke beyond the key 1.3837 resistance (previous low). Markets and the euro clearly found relief from this ‘joined’ response to at least one aspect of the crisis.

The Philly Fed survey was close to expectations, but markets apparently were happy that it didn’t bring another negative surprise. The euro came off intra-day highs at 1.3936, retested again the above mentioned key 1.3837 level, but stayed above, closing the session at 1.3877. Overnight, EUR/USD showed some volatility, but is still near yesterday’s closing levels.

Today’s economic events

Today, the calendar of eco data is thin and unlikely to affect EUR/USD in a lasting way. A stronger Michigan consumer sentiment might support the euro, as markets are more sensitive to good than to bad eco data in recent days due to the very bearish positioning at the start of the week.

More important will be the European meetings in Poland in the presence of Geithner. Markets have build some momentum going into these meetings, as they expect or hope that some kind of new initiative is brewing. Mr. Geithner will apparently make some propaganda for a kind of TALF operation to unfreeze the markets of non-core European government bonds. In fact it would leverage the EFSF (which size is too small). We probably know only after market closure or in the weekend whether the Geither idea has been taken up. It looks once more a solution that doesn’t fit well the German ortodox mindset, but one never knows. Will policymakers be for once ahead of the curve? It might be important for all markets.

We have as of yet not enough reasons to change tactics on the euro. We were a bit wrong-footed by yesterday’s sharp rebound on the ECB announcement with respect to dollar liquidity. However, we still assume that a big leap higher in EUR/USD won’t be that easy from the current levels. A sustained break above 1.3968/1.4055 (necklines multiple tops) would make us reconsider our position.

EUR/USD technical analysis

Drop from 14550 puts pair below 1.4055 (see graph: neckline Double Top: targets have been met), with daily Triple Tops off 1.3968 and currently back in Flag off 1.3495. Support area at 1.3834 (today’s low?), with next levels at 1.3810 (break-up hourly), ahead of 1.3784/ .3768 (break-up daily/ daily Short Term Moving Average↑ + daily envelope bottom) and 1.3703 (reaction low hourly + daily modified Alpha Beta trend bottom), where pause favored.

If unable to hold, next levels at 1.3636 (reaction low hourly), ahead of 1.3590 (idem) and 1.3529 (daily Bollinger bottom): tough on 1st attempts. Resistance at 1.3884/ .3896 (today’s high? + daily projection band top/ reaction high hourly), ahead of 1.3937/.3953 (current reaction high off 1.3495 + reaction high hourly/ daily Medium Term Moving Average↓) and 1.3969/.3976 (daily modified Alpha Beta trend top/ breakdown hourly), where pause favored.

If unable to cap, next levels at 1.4001 (daily envelope top), ahead of 1.4022/ .4036 (50% 1.4550 to 1.3495/ broken 200 Day Moving Average↑) and 1.4046/ .4055 (38.2% 1.4940 to 1.3595/ see graph): suspect tough on 1st attempts.

SUPPORT                         

1.3834 (see above)

1.3801 (break-up hourly)

1.3784/ .3768 (see above/ daily envelope bottom + daily ST MA↑)

 RESISTANCE

1.3884/ .3896 (see above)

1.3937/ .3953 (see above/ daily MT MA↓)

1.3969/ .3976 (see above/ breakdown hourly)

Source: KBC Bank

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