EUR/USD showed little momentum, but following Friday’s outsized gains, the pair traded with a downward bias and slid gradually during the Monday's session from opening levels around 1.4470 to a close at 1.4437, a daily loss of an insignificant 47 pips. It was essentially flow and technically driven.
The influential NY Fed governor Dudley and Fed vice-chairwoman Yellen, big guns inside the FOMC, repeated that the current loose Fed policy is still appropriate. No change in QE-2 is needed and inflation is not expected to take off in the long run. Therefore, the recent increase in oil and other commodities doesn’t warrant a substantial shift in the stance of monetary policy. This is intrinsically dollar negative as it contrasts with the ECB point of view and its actions (higher rates). However, it didn’t contain much new and was already well discounted in EUR/USD. There were no economic releases of importance during the day and interest differentials barely changed as US and German yields were up about 1 bps. The IMF offered some good advice to policymakers, but it didn’t get much attention either. Yesterday’s small profit taking in EUR/USD shouldn’t come as a surprise. Overnight, the profit taking move got more momentum. A Goldman report advised clients to lock-in trading profits before oil and commodity markets reverse. It stated that the oil price contained a $27 a barrel speculation premium.
We understand Goldman’s view. The recent run-up in commodity prices has been breathtaking and last Friday various commodities jumped higher setting new cycle highs. The risk appetite waning, or risk aversion rising is also apparent in the Asian equity markets and in the commodity currencies. The EUR/USD decline overnight is still moderate as the pair trades currently at about 1.44.
Recently, we stressed the importance of the longer term technical picture and the possibility of a major break through resistance, notably the Nov 2010 high at 1.4283. This means that a huge double bottom appeared on the charts with theoretically LT targets at 1.5706 and 1.6690. The LT downtrendline is also broken. Technically, the break was confirmed with a close at week-end. We shouldn’t row against the tide and, based on fundamentals and technicals, we favour a bullish euro strategy. However, short term overbought conditions and extreme euro positioning led to modest profit taking yesterday that might have further to go. Therefore, a buy-on-dips of the pair looks more appropriate than an outright long position at current levels, with 1.4021/00 the first major support and entry point. ST investors might still consider profit taking on euro longs, as the psychological 1.45 barrier looms, hoping to buy again into the pair at lower levels. ST investors may consider entering long euro positions at the uptrendline that comes in at 1.4277 today.
Regarding trading today, it looks like profit taking in commodity and equity markets might be the story of the day. Such a climate traditionally favours the dollar over the euro. Recent huge euro gains and the overbought character of the euro play in the same direction. There are a lot of Fed speakers (Dudley, Tarullo, Fisher and Hoenig) and ECB Stark, but the views of the former are well known by now. Stark might be more interesting, as he didn’t yet spoke in public since the ECB meeting. He is a hawk, but he might keep to the ECB party line as the ECB meeting is still very fresh. Eco data shouldn’t be of main interest.