Next Up on the Calendar for the EUR/USD

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This morning, sentiment on risk remained constructive. Asian equities are said to be supported by quotes from Chinese PM Wen that the country is on track to meet this year’s growth target and that it could take action to boost growth, even as these quotes were from yesterday. Strangely, Chinese equities are the underperformer in this move. Nevertheless, overall positive sentiment on risk is still supporting EUR/USD. The pair reached a new correction top this morning. The pair was trading at 1.2885 before declining to 1.2865.

As the day progresses there are several eco data events on the calendar on both sides of the Atlantic (CPI data in Europe, import prices and wholesale inventories in the US). They will have hardly any impact on currency trading. The focus today is on all kinds of political and institutional issues. There will be headlines on the Dutch elections, but the first results will only be available after the close of the European markets. Also today, the focus will be on the ‘State of the Union’ of EU’s Barroso. However, the key event of the day is the German court ruling on the EMU rescue fund. The court is expected to give the go ahead for the approval of the ESM. This should be a positive for risk. However, the court might suggest limitations/conditions on future financial support.

The question is how much good news is already priced in after the recent gains of the euro and of other risky assets in Europe. Yesterday’s price action at least suggests that EUR/USD is still sensitive to euro positive/dollar negative news. We assume that this trend will remain in place going into the Fed meeting, unless the German court would bring a negative surprise.

At the start of trading yesterday European markets were spooked by press headlines that the ruling of the German constitutional court on the ESM, scheduled for today, could be delayed. EUR/USD dropped to the 1.2760 area, near the post payrolls’ low. However, the uncertainty was soon removed as German officials confirmed that the court ruling would be announced as planned. EUR/USD jumped to the 1.2820 area, but the 1.2817/24 resistance did its job and EUR/USD settled again in Monday’s consolidation pattern. The pair drifted toward the lower end of that range.

The NFIB small business confidence and the US trade balance were slightly better than expected, but were largely ignored by the (currency) market. Early in the US, the price action in the currency market (and in several other markets) was reactivated by the headlines from a Moody’s briefing on the US AAA rating. The rating agency indicated that the US needs to put in place policies that produce a stabilization and then a downward trend in the federal debt-to-GDP ratio over the medium term in order to maintain its AAA-rating. If not, a rating downgrade has to be expected. These headlines triggered a new wave of dollar selling and EUR/USD jumped above the 1.2817/24 resistance. To be honest, we are a bit surprised by the sharp market reaction to these headlines (is it really that much of a surprise that the 2013 budget will be key for the US fiscal outlook and for its rating). The sharp reaction of the dollar overall, but also of EUR/USD illustrates that market sentiment is still dollar negative but also euro constructive. Also remarkable, the headlines from Moody’s not only marked the start of a sharp leap higher in EUR/USD, but also of the European equities, in particular the DAX. So, the euro crisis is probably not over yet, but European assets and the single currency had again a very good session.

Today we can expect relief once the official court ruling is made and then markets will turn their full attention to the big event. Mr. Bernanke’s statement and speech will be coming late in the day on Thursday. For now, there is no reason to row against the USD negative tide. So, we started the week with a cautious buy-on-dips approach for EUR/USD.

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About:FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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