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Optimism abounds, EUR rebounds & USD corrects lower

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Risk appetite improved as optimism has accelerated over a potential deal between the EU and Greece. Asian equities were broadly higher with the Shanghai composite up 0.96%, ASX 2.33% and Hang Seng index up 0.94%. Only the Nikkei has slightly weaker, down 0.3% as the JPY complex strengthened. US stock posted new highs despite data showing that U.S. consumer spending barely increased in January indicating the economy started the first quarter on the softer side. In the forex markets, USD was weaker against most currencies as Ukraine-Russian ceasefire deal remains fragile but still valid. EURUSD cleared the 21d MA at 1.1390 which had capped upside since Dec 2014, suggesting an extension of bullish trend to 1.1534. EURCHF dropped to 1.0579, yet a strong EUR and traders cautious of more SNB action pushed the pair back to 1.0615. USDJPY consolidated loses around 118.70, due to a less easing inclined BoJ Policy Board member Morimoto’s market disappointing comments. However, Morimoto view is in the minority and due to depart from the board this spring, but speculators remain jumpy ahead of next week’s BoJ policy meeting. In AUD/USD, RBA Gov Steven’s parliamentary testimony trigged a short squeeze to 0.7793, especially his lack of concern over yesterday’s weak job data.

FX markets remain focused on Greek and European bailout negotiations. While talks resume today there is increasing reports from government officials that both sides are willing to compromise on aid terms. In an positive, indication Greek Prime Minister Alexis Tsipras met his EU peers for the first time and stated that he see the political will to find an agreement on how to handle the existing aid program expiration. German Chancellor Angela Merkel stated that her meeting with Tsipras was ‘very friendly’ and that comprise was a key to Europe strength. She went on to say ‘I would like them to apply for the extension as soon as possible, and if the goal is to fulfill it by the end of February, then I’d like the intention to fulfill it to be announced soon.’ Financial markets are jumping ahead of the news pushing risk sentiment higher.

On the UK, Luc Luyet, Senior Market Analyst said: “The BoE’s quarterly inflation report showed an improved growth outlook and solid average weekly pay growth forecasts. Overall, the report sounded more hawkish than what the market was expecting as can be seen by the subsequent broad rise in the British pound. We see a further 1-2 month time window, where GBP should continue to appreciate as markets reassess the probability of a November rate hike, especially should the tensions in the Eurozone (Greece, Ukraine) recede. After that period, the uncertainties linked to the general election are likely to weigh on the British pound.”

On the docket today, Euro area Q4 GDP is likely to expand by 0.2% q/q, French GDP growth is likely to drop to 0.1%q/q from 0.3%q/q and German GDP is expected to rise to 0.4% q/q from 0.1%q/q. Traders expect US February’s preliminary consumer sentiment reading be unchanged to 98.1. But expectation are skewed to the upside as lower gasoline prices and strogner labor market continue to support sentiment. We remain constructive on the USD, supported by stronger US payroll print. However, we concede a short term EUR relief rally the closer we get to a Greek-Europe bailout solution.

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