These last two weeks have seen some consolidation of the euro, which despite a temporary break of the important support at 1.3500 for the EUR/USD on February 19, following the surprise announcement from the US Fed of a rise of its discount rate by a quarter point, was otherwise characterised by inactivity.
The chairman of the Federal Reserve, Ben Bernanke, has not failed to reaffirm repeatedly last week that the Fed intends to keep its key rate at a low level for several months. Attention will focus this week on today's meeting of the Governing Council of the European Central Bank. No change is expected as it will certainly maintain the key rate at one per cent, but questions will arise whether Jean Claude Trichet, as expected by the market, will announce a reduction of the emergency measures set up by the ECB after the banking crisis that began in September 2008.
This announcement comes at a particular moment for the eurozone which is facing its most serious crisis since the launch of the single currency in view of the Greek economic problems. This week the euro should remain in range trading even though we believe volatility will remain important. The single currency will certainly be caught between the poor consumer confidence index and real estate sales in the US, expectations of the US unemployment figures tomorrow and the uncertainties surrounding the steps which should be taken by the European officials, particularly French and Germans, to assist Greece. Greece has a March 16 deadline to demonstrate progress on the measures put in place.
The pound sterling is the currency which has suffered most in recent days. It seems, however, that the United Kingdom is pleased not to have joined the EU monetary system and is seemingly not unduly concerned about the depreciation of its currency. The latest revisions of the GDP figure released last Friday showed that the recession was deeper than anticipated in the United Kingdom.
Still, in addition to these mixed economic signals, the UK political uncertainty, due to fears of a hung Parliament after the forthcoming elections, continued to weigh on the pound, which lost seven per cent since the beginning of the year against the US dollar.
The Central Bank of England also meets today and no rate hike is expected. We believe that the GBP/USD should continue to experience strong downward pressure this week, confirmed by the definite break through 1.500 last Monday. Rumours of a sale of £16 billion against the US dollar on the part of Prudential Plc to buy a stake in AIG Asia certainly reinforce this trend.
The Central Bank of Australia has increased its rate by 25 basis points on Tuesday and AUD/USD should now withdraw, especially if the Reserve Bank of Australia announces a pause in the upward cycle.
Upcoming FX Key events
Today: Eurozone GDP, BoE meeting, ECB meeting.
Tomorrow: US unemployment rate.
FX Technical Key points
EUR/USD is bearish, target 1.3000, key reversal point 1.4500
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.4700, key reversal point 1.7000
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650
Mr Bovay is senior trader at RTFX Ltd.
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