EUR/USD to test year highs

Wednesday 2 Dec, most markets were waiting for key data and events scheduled for today and tomorrow. Stocks basically hovered sideways, close to Tuesday’s closing levels. The EUR/USD price action copied this trading pat-tern. The pair settled in a sideways trading range close to the 1.51 mark. The only eco data with market moving potential, the ADP labour market report, came out too close to expectations to give markets a clear guidance. At around the close of the European markets, the S&P tested the year highs, but the test was rejected. The subsequent ‘correction’ also pushed EUR/USD a few ticks lower. The pair closed the session at 1.5044, compared to 1.5081 on Tuesday evening. The Fed Beige book didn’t bring any high profile new hints on the Fed strategy going forward. After the close of the US markets, Bank of America announced that it will repay $45B of Bail-out funds. This might be a positive factor for (financial) stocks and may support global investor sentiment. EUR/USD is off from the yesterday’s lows in Asia this morning.

Today, the eco calendar is very interesting. In the US, the Q3 productivity data, the jobless claims and the ISM non-manufacturing are on the roster. However, for once, the focus might be on Europe. Last month, ECB president Trichet announced he would have a rendezvous with the markets on the bank’s exit strategy today. The ECB president will have the difficult task to communicate to the markets that it is starting to scale down extraordinary measures to support liquidity for the banking sector without creating the impression that is intends to raise interest rates anytime soon.

The market reaction to this balanced message might also have consequences for the currency market. The reaction on the currency market to a series of technical measures is not easy to asses, but if markets would get the feeling that the ECB is moving ahead/at a faster pace than the Fed (or the BOE), this might give the euro additional support. On top of that, global investor sentiment will also remain a factor of importance for EUR/USD trading. We wouldn’t be surprised to see equities trying a new attempt to move higher on the back of the Bank of America announcement. So, the overall context continues to be EUR/USD constructive, we believe.

Recent ‘Dubai-driven’ price action suggested that it is too early to leave the risk-theme as driver for EUR/USD trading. Even after the Dubai crisis, EUR/USD is still within striking distance of the highs. So, the dollar was not really able to make any sustained gains against the euro on this issue. The downside in EUR/USD looks rather well protected for now. A test of the year highs is highly prob-able.

Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec 2008 high) improved the picture, but the move continued to develop in a gradual way. Nevertheless, the corrections, if any, were very limited, too. The pair tested several times the longstanding uptrend line since March, but a break didn’t occur. So, the ST picture remains euro constructive, even as the momentum of the uptrend was waning. Last week’s break above the previous high was a new USD warning signal but this was called off by the Dubai correction at the end of last week. The long-standing uptrend was challenged on Friday, but once again, no a clear break occurred. So, the positive bias in this pair remains in place. We don’t row against the tide and hold on to our buy-on-dips approach. A break above the year highs probably won’t trigger a lasting acceleration of the uptrend, but would reinforce the longstanding trend.