Speculators still short Euro

January 30, 2012 — Mitul Kotecha

Since I wrote “Beware of EUR short covering” EUR/USD has gained around 4%. EUR/USD is trying to gain a foothold above 1.3200 but failed overnight. Further gains will be more gradual. Helping the EUR is the fact that short positions hit an all time high according to IMM data for last week. However, data releases are unlikely to provide much impetus to the EUR, with most attention on the monthly series of PMI manufacturing confidence indices as consumer confidence readings.

At best the data will show some stabilisation but market will focus instead on the EU Summit beginning today and ongoing Greek debt talks as well as Italian debt auctions today. Greek debt talks are expected to be finalised this week including writedowns of around 70% but tensions over a German proposal to create a “budget commissioner” could yet hit the EUR.

The major release of the week in the UK is the January PMI manufacturing survey although there will also be attention on housing data including mortgage approvals and house price surveys from the Nationwide and Halifax. Overall the data will do little to dispel fears about the UK economy following the contraction in Q4 GDP revealed last week.

GBP will likely remain resilient to any bad economic news however, but its gains look limited especially given the revelation in the BoE MPC minutes that some members thought that more quantitative easing will be required. Having strengthened against the USD but weakened against the EUR over recent days, GBP continues to trade in a middle of the road manner. GBP/USD sellers will likely emerge around the 1.5870 resistance level while EUR/GBP is set to consolidate around 0.8350.

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US dollar remains under pressure

January 30, 2012 — Mitul Kotecha

Hopes of progress on the Eurozone debt crisis and encouraging data in the US have helped boost market confidence. However, the slightly disappointing US Q4 GDP report (2.8% Qoq annualised growth) revealed the markets continued vulnerability while Fitch’s downgrade of six Eurozone countries’ sovereign ratings brought a dose of reality back to the region.

Nonetheless, the Eurozone Central Bank (ECB) unlimited 3-year loans to banks and Fed hints at quantitative easing (QE3) have provided markets with a fillip and will help underpin risk assets over coming weeks. If Greek debt talks are wrapped up this week markets will take further solace but the European Union (EU) Summit beginning today will need to deliver on rubber stamping recent agreements for positive sentiment to be maintained.

This is a big week for US data releases and in turn the USD. Heavy weight data including January non-farm payrolls, ISM manufacturing confidence and consumer confidence readings are on tap over coming days. Although payrolls will not be as strong as in December the trend of data releases will continue to be one of improvement as likely to be revealed in the forward looking confidence surveys this week.

The USD may not benefit as much as it would otherwise have done given that the Fed has committed to easy monetary policy for a long while to come to end 2014. It is becoming increasingly clear that firmer activity data may still not prevent a further round of quantitative easing and attendant USD downside risks. Against this background a cautious stance on the USD over coming days is warranted, with the USD index likely to remain under near term pressure.

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