Currency Outlook Ahead of ECB Meeting

05/08/2009 12:01 am EST

Focus: FOREX

While the markets are awaiting another rate cut from the ECB and an announcement of non-standard measures, let's take a look at how the euro is performing recently. Indeed, the common currency has been one of the worst performers among major currencies. YTD, euro is down around -4.5% against the US dollar, -8% against sterling, -8.5% against the Canadian dollar, and -9.3% against the Australian dollar. Euro only managed to gain around 3.3% against the yen since January 1. Since April 1, euro is nearly flat against the US dollar, down -4.8% against sterling, and down more than -6% against the Canadian and Australian dollars.

Risk aversion was the main driver in the markets in early part of the year as most currencies dropped against the dollar and yen, and the euro was indeed ranging against the Aussie. As stocks bottomed in early March, most currencies rebounded too, following stocks. However, euro somewhat lagged behind CAD, AUD, and even GBP in the rebound against the dollar and yen since early April. The primary fundamental reason should be speculation that the ECB will eventually adopt quantitative easing on the deteriorating economy in the euro zone. On the other hand, the RBA will likely maintain the highest interest rates among major central banks, while the BoC decided to hold off quantitative easing for the moment. Another main factor is the return of risk appetite. Euro fell farther against AUD and CAD as stocks extended their rebound.

Having said that, two main events on Thursday were closely watched by euro traders. First, the ECB should announce another 25bps cut and the set of non-standard measures to be adopted. Secondly, the results of bank stress tests in the US, and attention will be on the subsequent reaction of stocks. Some short-term volatility might be triggered by these events and could send the euro higher against the US dollar, yen, and sterling. Nevertheless, based on the broad technical outlook of individual pairs, it's likely that the euro will resume weakness as short-term volatility settles.

Looking at individual pairs, EUR/AUD broke out of a multi-month range in March and extended the fall there to as low as 1.7745 so far. As mentioned in prior reports, the fall from 2.1127 is expected to continue to the 61.8% retracement at 1.5472 (2007 low) to 2.1127 (2008 high) at 1.7623. EUR/AUD could probably stabilize only after entering into a support zone below 1.7424. Action above the 1.8646 resistance is needed to indicate a bottom or the short-term outlook will remain bearish.

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EUR/CAD 's fall from 1.7499 is confirmed to have resumed after this week's break of the 1.5634 support. More importantly, EUR/CAD is now moving away from the 55-week EMA (now at 1.5843). In addition, EUR/CAD has broken medium-term rising trend line support too. As the whole uptrend from 1.3285 has completed already, the current fall will likely extend further towards the support zone of 100% projection, 1.7499 to 1.5634 from 1.6964 at 1.5099 and the 61.8% retracement of 1.3285 (2007 low) to 1.7499 (2008 high) at 1.4895. A break of the 1.6196 near-term resistance is needed to invalidate this bearish view.

EUR/GBP has topped out at 0.9799 and has turned into medium-term consolidation since then. The short-term outlook is neutral for the moment, before a break out from the range of 0.8785 and 0.9080. But a break of the 0.8785 low will indicate that fall from 0.9494, which is treated as the third leg inside this medium term consolidation, has resumed and would probably target the 55-week EMA (now at 0.8470) before completion. Even in case of a break of 0.9080, upside will likely be limited below 0.9494 to continue the consolidation.

EUR/USD has been rather mixed recently and the recent rise from 1.2884 lacks convincing momentum so far. But after all, recent price actions are still treated as part of the medium-term consolidation from 1.2329. While further upside might be seen in the near term, the upside should be limited below 1.4719 resistance to continue the consolidation. Eventually, the downtrend from 1.6039 is expected to resume sooner or later.

It's still uncertain whether EUR/JPY's rebound from 112.10 has completed at 137.38 already. But after all, even in case of a further rise, the upside should be limited and terminate between the 50% retracement of 169.96 to 112.10 at 141.03 and the 61.8% retracement at 147.85 and bring a downtrend resumption.

By Staff

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