In a relatively quiet start to the week, the euro stabilised against the US dollar after Friday’s heavy drop. Concerns over Greece returned to the spotlight, drove peripheral market spreads wider and contributed to a general softness in risk appetite.
With the European Central Bank interest rate decision and Jean Claude Trichet’s news conference out of the way, investor focus shifted back to the situation in Greece. Although major points of the new financial aid package were seemingly falling in place, policymakers were bickering over a proposal for the involvement of private investors. The ECB has been reluctant on any private sector involvement and to rolling over of Greek debt, while politicians, mainly in Germany backed by banks, are in favour.
On Thursday during the ECB press conference, following the interest rate decision, in which the governing council opted to keep rates unchanged at 1.25 per cent, Mr Trichet used the words “strong vigilance” to describe the central bank’s stance on fighting inflationary pressures. Over the years, the use of “strong vigilance” has been associated as a signal to an imminent rate hike. However, after an initial rise to a fresh daily high, the euro soon sold off against the dollar as forex investors cut their euro long positions and took profits on anticipation that a July rate hike had effectively already been priced in.
Also contributing to a rapid sell-off by the euro was Mr Trichet’s repeated emphasis on the ECB’s opposition to any action leading to a “credit event” or “selective default” and, on the sovereign crisis, he said the ECB’s holdings of Greek debt would not be rolled over.
The Swiss franc was well bid at the start of the week, benefitting from the lingering European debt crisis. The CHF hit a record peak versus the euro on Monday, at 1.2004, as forex investors cut their bets on the single currency and other riskier assets in favour of the ‘safe-haven’ Swiss franc.
The euro recovered later on Monday as Mr Trichet, speaking at the London School of Economics said that the use of non-standard measures, did not limit the central bank’s ability to tighten monetary policy. He went on to say that April’s rate hike evidenced the difference between the two.
Meanwhile later on Monday, S&P slashed Greece’s debt rating by three notches to ‘CCC’ and stated that a restructuring in any form will most likely “result in one or more defaults”. The move by S&P, which followed Moody’s, came as no surprise and investors are not expected to be surprised by any future downgrades.
Despite the move by S&P, risk sentiment improved late on Monday and on Tuesday. The euro recovered versus its major rivals and also against the Swiss franc. The single currency was up almost 0.90 per cent against the yen and Swiss franc on the week, and 0.60 per cent versus the greenback.
In our monthly scenario for EUR/USD, RTFX TraderTip suggests further bearish potential towards 1.3931, as long as we remain below 1.4668. The weekly and monthly scenarios for the pair EUR/CHF suggest an extension to the current downward move, but set a bottom at 1.1899.
Economic data from China showed inflation figures were not as benign as initially feared while growth was still steady, boosting risk appetite further on Tuesday. Also on Tuesday, the Bank of Japan kept its policy rate unchanged at zero – 0.10 per cent while making no change to its asset purchases programme.
China raised the banks’ required reserves ratio by 50 basis points also on Tuesday. This latest rate hike raised the ratio to 21.5 per cent in an effort to fight inflation which is at a 34-month high.
Inflation data from the UK failed to boost expectations for an interest rate hike by the Bank of England in the near future. UK CPI came in line with expectations, at an annual rate of 4.5 per cent, but forex analysts were hoping for a significant surprise to the upside in order to fuel interest rate expectations.
Sterling pared gains versus the euro and the dollar following the inflation data but was still higher versus its major rivals on the week. Cable (the exchange rate between sterling and the US dollar) was up over one per cent versus the greenback by the time of writing and almost half a per cent against the euro.
Our monthly scenario for EUR/GBP suggests bearish potential for a drop to 0.8561 while below 0.8802 – 0.8897. Upside risks are represented by 0.8897 – 0.8993. GBP/USD is expected to continue to trade in a range between 1.6091 – 1.6772.
Upcoming FX key events:
Today: EZ HICP, US Building Permits & US Housing Starts.
Tomorrow: US Michigan Consumer Sentiment.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is bearish, target 0.8600, key reversal point 0.8980.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8200, key reversal point 0.9300.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.