Euro at 16-month lows against USD and GBP

At the end of last week we got some encouraging data from US payrolls. The ADP National Employment Re­port, heralding the data, came out strongly a day before the official data. Non-Farm payrolls rose to +200k, while private payrolls rose +212k in both cases beating previous and expected figures.

The stronger US data fed directly into support for the dollar- Rudolf Muscat

The unemployment rate for the month of December slipped to 8.5 per cent. The stronger US data fed directly into support for the US dollar, while usually we would have been accustomed to see the greenback gain on risk aversion.

At open last Monday the EUR/USD dipped to 1.2666, marking 16-month lows for the currency pair, throughout the former part of this week the euro recovered at least 1.2 per cent managing to recover 1.28 levels, ahead of the ECB’s interest rate decision.

The euro bounced higher on Tuesday against the dollar lifted by a short squeeze. EUR/USD rose to 1.2818 on stop loss buying – the pair climbed off Monday’s lows at 1.2666. EUR/JPY was also lifted by a short covering, as it moved away from an all-time trough of 97.29. The single currency found support amid optimism that Europe’s leaders are taking concrete steps to resolve the debt crisis, and as investors took some profits on their short euro positions.

In the near term possible downside target for the EUR/USD is 1.2600, the 76.40 per cent retracement of the move higher from June 7, 2010 lows to May 4, 2011 highs. For the current week we expect support at 1.2587 to hold and after the move lower the currency pair should reattempt the 1.2967 area.

On Monday French President Nicolas Sarkozy and the German Chancellor Angela Merkel met ahead of the January 30 summit. No major new headlines came out of the meeting but the two leaders announced the time line for the closer fiscal union for the common currency area and Greece got some focus as well. In their joint press conference following the meeting Merkel and Sarkozy warned Greece that it will get no more bailout funds until they agree a bond swap with creditor banks.

Ahead of us today the ECB and the BoE will be communicating their interest rate decisions. Both central banks are expected to stay on hold. After its two consecutive 25bp cuts in the previous months the ECB is expected to pause. The weaker euro and the successful three year LTROs (long term refinancing operations) that has helped to ease the bank’s financing stress are the main reasons why the ECB is expected to remain on hold. The European Central Bank may be resuming easing later in the first quarter dependant on the economic situation.

Investors will be eying ECB President Mario Draghi’s comments at the customary news conference, held 45 minutes after the release of the official policy decision, for clues on the future rate cuts or on the bond buying programme.

Data for Swiss CPI came out to be less of a motivating factor last Friday. As mentioned in last week’s commentary speculation was building that a strong reading into deflationary territory could put pressure on the SNB to take additional measures such as raising the EUR/CHF floor. While data continued to point towards deflationary pressures analysts commented that the level of deflationary pressures does not so far justify additional measures from the SNB.

The Swiss Franc recovered some strength on news last Monday that the Swiss National Bank Chairman handed in his resignation. Philipp Hilderbrand stepped down after allegations that his wife had made substantial transactions in CHF ahead of the SNB’s market interventions towards the end of last year.

The EUR/GBP has traded in the range of 0.8221 - 0.8287 in the former part of the week. The lows made by the euro mark 16 month lows, with these levels last seen back in September 2010. Despite the recent gains for the British pound risks of it weakening exist especially if the eurozone crisis pushes further support towards the safe haven USD and the sluggish economic UK growth keeps weighing on the GBP.

For the current week we expect support at 0.8200 to hold, the EUR/GBP’s bearishness, and we expect it to resume higher levels towards 0.8332 - 0.8419 area towards week-end.

A part from the ECB’s policy meeting, today and tomorrow the single currency faces more pressure with Spain and Italy due to conduct bond auctions.

Upcoming FX key events:
Today: EZ ECB Interest Rate Decision and news conference, UK BoE Interest Rate Decision & German HICP.
Tomorrow: UK PPI & US Preliminary Michigan Consumer Sentiment.

FX technical key points:
EUR/USD is bearish, target 1.2590, key reversal point 1.3350.
EUR/GBP is bearish, target 0.8050, key reversal point 0.8550.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 1.0050, key reversal point 0.8550.
AUD/USD is neutral.
NZD/USD is bearish, target 0.7300, key reversal point 0.8250.

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Mr Muscat is a senior trader at RTFX Ltd.