The euro rally from the back end of last week to early Monday morning took a pause on Tuesday as resurfacing of eurozone debt following Moody’s downgrade of Greece’s debt rating appeared to be weighing on the single currency. The rally in the euro against its major counterparties was spurred by increasing expectations for an interest rate hike as early as April.
On Thursday, European Central Bank announced it would keep rates unchanged. However, in the following news conference by ECB President Jean Claude Trichet EUR/USD shot up to daily highs of 1.3976 from as low as 1.3833 prior to the conference, as Mr Trichet opened up to the possibility that an “increase in interest rates at the next meeting is possible.”
Mr Trichet also announced that the outlook for inflation risks is on the upside and that strong vigilance is essential. This resulted to markets pricing in a rate hike in April which drove the EUR/USD to a four-month high at 1.4036.
Remarks by ECB governing council member Ewald Nowotny on Tuesday dampened enthusiasm and together with remerging eurozone debt woes extended the single currency’s retreat versus the US dollar and sterling. Mr Nowotny said the European Central Bank never pre-commits on interest rate moves and said he does not foresee any long-term problems by just looking at inflation rates.
Moody’s rating agency slashed Greece’s sovereign debt rating by three notches to B1 with negative outlook, on worries that the country’s efforts to reduce its debt may not be sufficient. This news helped curdle some of the positive sentiment towards the euro and put debt issues back into light.
Forex analysts are saying any signs that European leaders are struggling to reach consensus on the eurozone’s rescue fund, including the size of the package, could trigger more profit taking on the euro.
Despite a better than expected US jobs report, the US dollar continues to remain out of favour on the view that the Federal Reserve will lag both the ECB and the Bank of England in raising its interest rates. Non-farm payrolls released last Friday showed an increase of 192k in February, up from a revised 63k in January. Private payrolls were up to 222k, while the unemployment rate edged lower to 8.9 per cent against predictions for an increase to 9.1 per cent. The greenback failed to rally on the back of the positive jobs report as investors seem to have been expecting an even stronger report.
The US dollar’s recently found short-term support is not attributed to renewed dollar strength however, but to the renewed concerns on the euro and covering of long euro positions.
Meanwhile, in Libya, attacks launched by troops loyal to Muammar Gaddafi have increased the prospects of a civil war in the country and a quick resolution like that of Tunisia and Egypt is now becoming more unlikely. Crude oil prices hit fresh two and a half year highs on Monday due to the increasing tensions. Global markets and especially Asian stock markets are under pressure as a result of the Middle East unrest.
Investors are worried that high oil prices could suppress economic growth and eat away at corporate profits. US authorities have reiterated that they could tap their strategic oil reserves in order to preserve economic growth in the face of rising gasoline prices.
Sterling struggled for most part of the past week especially against the euro on growing expectations the ECB will raise interest rates before the BoE. As both central banks are coming to grips with rising inflation, most speculators now seem to have priced in a rate hike by the BoE in June or July while the ECB may start tightening monetary policy as early as April.
Cable had eased to a five week low at the time of writing versus the euro, while against the greenback, sterling is moving further away from a 13-month high hit last week at 1.6344. Its inability to extend gains beyond this mark and recent weak data from the UK including Monday night’s retail sales data are weighing on the pound.
RTFX TraderTip Weekly scenario for EUR/GBP predicts the continuation of the uptrend with a rally to 0.8624 or 0.8647, with a pullback to 0.8554 – 0.8528 possible. RTFX Trend is bullish since March 2 for EUR/GBP, with a total gain of 1.50 per cent recorded to the time of writing.
Gold rallied on to a fresh all-time high Monday on renewed risk aversion due to Moody’s downgrade of Greece and fears of escalation of violence in Libya. XAU/USD hit 1,444.75 before retreating slightly to 1,425.95 Tuesday morning. RTFX TraderTip warned that if the market breaks the 1,444.65 point, it could reach the “sky”.
Upcoming FX Key events:
Today: EZ ECB Publishes Monthly Report & UK BoE Interest Rates Decision & Asset Purchases Target.
Tomorrow: US Advance Retail Sales & Michigan Confidence Preliminary, Canadian Net Change in Employment & German HICP.
FX Technical Key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9500.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.