The EUR/USD extended the downward correction that started earlier this week. The move was to a large extent inspired by end of quarter repositioning. Negative headlines on the European economy and risk-off sentiment on the equity markets were no help. And of course, instigated by Fed Chairman Bernanke’s comments. A late session rebound on the US equity markets contained the damage, also for the EUR/USD cross rate.
Equities and EUR/USD succumbed to additional profit taking on risk. The economic data provided a good excuse for further profit taking. The final US Q4 GDP revision and the claims didn’t change the picture on the US economy. There was some USD buying going into these data, pushing EUR/USD to an intraday low of 1.3252, but there was no follow-through action afterward.
End of quarter positioning/profit taking played an important role in several markets and this affected also the price action in EUR/USD. The pressure on equity markets eased after the close of the European markets. A late session rebound on US equity markets helped EUR/USD to contain the daily losses. EUR/USD closed the session at 1.3302, compared to 1.3317 on Wednesday evening.
There was also a lot of analysis on the eurozone firewall that will be discussed at the meeting of EUROZONE finance Ministers this morning. However, the issue had not that much direct impact on trading. End of quarter position squaring was the key factor. If this analysis is right, one shouldn’t draw too firm conclusions from yesterday’s price action for the near future.
Today, the economic calendar is quite well-filled as it is the last business day of the month and the end of the 1st quarter.. The flash EUROZONE CPI is expected to show a decline of EUROZONE inflation to 2.5% Y/Y from 2.7% Y/Y. Of late inflation was no big issue for EUR/USD trading.
There will again be a lot of media coverage of the meeting of EUROZONE finance Ministers on the financial firewall. It seems that the firewall will consist of combination the EFSF (temporary) and the ESM permanent. In theory, this could raise the firewall temporary to €940 bln, but Germany will probably include practical obstacles that will de facto limit to use of the full amount. These kinds of ‘European solutions’ often confront investors with the question whether the glass is half full or half empty.
Nevertheless, such a scenario might be cautiously positive for the single currency. Investors will also keep a close eye on the new budget measures/reforms that will be announced in Spain. In the US, the calendar contains the February income and spending data, the Chicago PMI and the final Michigan consumer confidence.
In aggregate, the consensus expects a reasonably strong set of data. So, there might be a risk to the downside. That said, the market will put the outcome of the data against the soft comments of Bernanke earlier this week. Data in line with expectations might support risky assets. The impact for EUR/USD is less clear. Looking at the price action of late, the euro didn’t do that bad.
The losses due to risk-off sentiment yesterday were limited and the EUR/USD is gaining further ground in Asia this morning. So, in a day-to-day perspective, EUR/USD might go for a retest/break of the week high at 1.3386. In case of the break to year top at 1.3487 might come in the picture. Next week’s US data will decide whether there is enough evidence to restart a cyclical rebound of the US currency. It is more likely to see the euro fall to trade between the 1.31 to 1.32 range.