EUR/USD Sets New 2011 High Going Into The ECB Meeting

Sunrise Market Commentary

• Global core bonds correct lower
  Global core bonds were under downward pressure virtually from the opening of trading in Europe to the closure in the US. Stronger eco releases in the EU and US didn't provoke immediate reactions. Today, the ECB-meeting and the fol-lowing press conference will be very closely monitored.
• EUR/USD sets new 2011 high going into the ECB meeting
  On Wednesday, the correction in EUR/USD didn't last long as markets expected the ECB to raise its inflation alert which gave the euro additional interest rate support. EUR/USD reached a new 2011 top. Trichet holds the key to decide on a further up-leg of the single currency

The Sunrise Headlines

• US Equities ended slightly up on Wednesday led by gains in energy shares. This morning, most Asian shares trade in positive territory, while Chinese stocks lose some ground on expectations that inflation will rise above 5%.
• The European Central Bank is expected to step-up its anti-inflation rhetoric at the monetary policy meeting today as it may raise its alertness on inflation. Another step in the exit policy is likely, but it might be a small step rather than a giant leap.
• Libyan leader Muammar Gaddafi and the president of the Arab League are considering a peace plan from Venezuela's President Hugo Chavez to end the crisis in the North African country, news agencies reported this morning.
• Bundesbank President Axel Weber has proposed to automatically extend ma-turities of bonds issued by countries that tap Europe's future rescue fund in order to give them breathing room to consolidate their public finances.
• Many manufacturers are passing along higher input costs to their customers, a sign that rising prices for commodities could increasingly reach consumers, the Fed's Beige Book survey showed.
• China's annual inflation is likely to top 5% in the first quarter of 2011, a senior government economist said this morning.
• Brent crude oil prices dropped this morning below $115/barrel on speculation that a peace plan to end the crisis in Libya was under consideration.
• Today, the eco calendar contains the euro zone (final) and UK services PMI, the US non-manufacturing ISM, euro zone retail sales, preliminary estimate of euro zone Q4 GDP and US initial claims. The ECB holds its monthly policy meeting.

Currencies: EUR/USD Sets New 2011 High Going Into The ECB Meeting

EUR/USD

On Wednesday, EUR/USD opened the session on a weaker footing. The pair was seen in the 1.3745 area after a correction on Tuesday evening. Question was whether this was just a technical correction after the rejected test of the 1.3857/62 resistance area (week highs/year high) or whether the euro had again become more sensitive to global risk aversion. The jury is still out on this issue as markets don't really know how to react to higher oil prices. However, at least for now, it looks that the decline on Tuesday evening and yesterday morning was nothing more than a simple correction. In Europe there were only some second tier eco data on the agenda, but the euro soon found again a better bid. EUR/USD traded again in the 1.3840 area around noon in Europe. The dollar tried a moderate comeback going into the ADP labour market report. The report showed a rise in private jobs of 217 000, well above the market consensus. However, there were no follow-through gains of the US currency against the euro. Even more, EUR/USD even set a 'minor' new high for 2011 at 1.3890. The expectation that the ECB will step up its inflation rheto-ric today kept the euro well supported. A further slide on the equity markets and oil holding close to the $115/116 level (Brent) were unable to derail the single currency. The Beige Book, giving input for the March 15 Fed meeting indicated that that overall economic activity continued to expand at a modest to moderate pace in January and early February. However, in general there was no euphoria on the progress in the la-bour market yet. EUR/USD closed the session at 1.3866, compared to 1.3777 on Tuesday

Today, the calendar is extremely busy with several items that have market moving potential. In Europe the (final) services PMI's; the January retails sales and the pre-liminary release (with details) of the EMU Q4 GDP will be published. These data might provide interesting information on the health of the European economy, but in-vestors and traders probably won't adjust positions ahead of the key ECB policy meeting. The ECB press conference will be a key factor for investors to decide whether there is enough reason to push EUR/USD for an further up-leg beyond the 1.3862 resistance which is showing serious cracks. We expect Trichet to hold a hawkish tone (for an in debt analysis of the ECB policy decision see our KBC flash report and the bond part of this report). Of course, interest rate markets have already priced in the rising chance of an ECB rate hike mid this year. Nevertheless, the ECB indicating that inflation risks have moved to the upside and/or the Bank raising its 2012 inflation forecast above 2.0% would be a strong sign that an early ECB rate hike is highly probable. Such a scenario might pull the trigger for another up-leg in EUR/USD. The US initial jobless claims and the ISM of the non-manufacturing sector are interesting from an economic point of view. However, with the Fed giving no indi-cation at all that it intends to change its assessment/tactics anytime soon, the relevance of these data for markets should be limited after all. As was the case over the previous two weeks, oil and the tension in the MENA countries will continue to play a role on the background. However, we expect the ECB to be the decisive factor for EUR/USD trading today.

Looking at the technical charts, EUR/USD yesterday moved already (temporary?) above the 1.3862 resistance and the test is ongoing. Of late, we advocated that a sustained break above this 1.3862 resistance wouldn't be easy. Over the previous days, our working hypothesis was under heavy pressure. If the euro would get addi-tional interest rate support after the ECB press conference, we will have to adapt our strategy as it would open the way for a retest of the November high (1.4282).

EUR/USD: setting new 2011 top ahead of the ECB meeting.

Support comes in at 1.3827/08 (break-up hourly/ STMA + Daily envelope), at 1.3730/12 (Daily flag bottom)/MTMA +reaction low), 1.3694 (Broken daily down-trend line) and at 1.3641 (LTMA).

Resistance stands 1.3890/96 (Reaction high hourly/Daily Boll top), at 1.3932/47 (Daily Flag top/76% retracement since 1.4283) and at 1.4010 (2nd target double bottom).

The pair is in overbought terri-tory.

USD/JPY

On Wednesday, the USD/JPY cross rate showed some intraday swings but at the end of the session the difference with Tuesday's close was again very limited. USD/JPY tried to regain the 82.00 mark early in Europe and after the publication of the stronger than expected ADP labour market report. However, the dollar remained under pressure across the board as higher oil prices and declining interest rate sup-port weighed on the US currency. USD/JPY reached an intraday low at 81.57. Of course, the higher oil price is also not a present for the Japanese economy and for the yen. So, traders didn't really know which way to go. USD/JPY regained the ear-lier losses. The pair closed the day at 81.87, almost unchanged from the 81.86 close on Tuesday.

This morning, Q4 capital spending data in Japan were reported below market con-sensus. This might have negative implications for the revision of the Q4 GDP. Asian stocks are mostly in positive territory (except for China). At the moment of writing, the oil price shows some tentative signs of topping out. It is not yet clear whether this move will have strong legs. However, if US bond yields would move higher (in case of easing tensions in the Middle East or for another reason), this might give USD/JPY downside protection.

Recently we favoured range trading in the 81.00/84.50 sideways pattern. Early February, a correction bottomed out in the low 81.00 area and the cross rate reached a correction high just below 84.00 mid-February. However, the rebound did run out of steam as the rise in US interest rates slowed. An unexpectedly sharp rise in US bond yields will probably be needed to push USD/JPY beyond this range top. However, of late, US data were unable to inspire such a move. So, we expect the above men-tioned range to hold for now. Last week, USD/JPY made a setback due to declining interest rate support for the US dollar and as the yen profited from safe haven flows.

In a day-to-day perspective, the pair is still within striking distance of the 81.10/80.93 support area. We continue to doubt that risk aversion originated by tensions in the Middle East should be a lasting support for the yen. So, for now, we assume that the 81.10/80.93 range bottom will hold.

USD/JPY: capped by higher oil prices

Support is seen at 81.57 (week low), at 81.43 (Broken daily downtrend line), at 81.24/10 (Daily Boll bottom/Reaction low), at 81.93 (year low) and at 80.54/21 (Nov Low/2010 low)

Resistance comes in at 82.14/24 (Daily envelope/Week high), at 82.45/53 (LTMA/MTMA), at 82.67 (Weekly envelope) and at 83.01 (Breakdown daily).

The pair is in oversold territory

EURGBP

On Wednesday, there was again no big story to tell on EUR/GBP trading. The cross rate reached an intraday low at 84.64 after the publication of a better than expected PMI of the UK construction sector. However, the week low at 0.8460 held. Later in the session, EUR/GBP joined the rebound in EUR/USD and filled offers just above 0.8500 late in Europe/at noon in the US. The pair closed session at 0.8493 (com-pared to 0.8469 on Tuesday).

This morning the Hometrack housing survey came out at -0.2%M/M and -2.7% Y/Y. EUR/GBP tries to extend gains above the 0.8500 mark. Later today, sterling traders will keep an eye at the UK PMI of the services sector. A moderate decline from 54.5 to 53.7 is expected. However, the euro side of the story will prevail today. ECB's Trichet bringing a hawkish message at the press conference might also support this euro cross rate.

In a longer term perspective, we expect a bumpy road for the UK economy in 2011. The BoE faces a big policy dilemma. Inflation remains much too high, but the real economy will most probably require ongoing policy support. Since early January, the pair moved up and down within a range of 0.8285 and 0.8672. In the first halve of February, investors started taking into account the scenario of an early UK rate hike. This supported sterling. At the same time, the euro ceded some ground as Trichet didn't step up his inflation rhetoric at the February meeting. In the February inflation report, the BoE saw rising upside inflation risks. However, BoE governor King was less committed to a rate hike than a lot of investors had anticipated. So, there was a window of opportunity to take profit on sterling long positions. From here, we expect some consolidation in EUR/GBP. The downside in this pair has become better pro-tected. Hawkish ECB talk might continue to support this process. A first important support is coming at around 0.8355/60, while 0.8285 is the key point of reference. We expect this level to be tough to break without high profile news. The day-to-day overall euro gains might cause EUR/GBP to try to regain the 0.8529 neckline.

EUR/GBP: slightly higher on overall euro strength

Support comes in at 0.8483 (Re-action low + LTMA), at 0.8461/60 (Reaction low + MTMA/Daily Boll Midline), at 0.8445 (Break-up daily + daily envelope), at 0.8429/22 (Weekly enve-lope/reaction low hourly) and at 0.8406 (Break-up hourly).

Resistance is seen at 0.8504 (STMA), at 0.8518 (Breakdown hourly), at 0.8549/54 (Daily Boll top/Reaction high) and at 0.8688/94 (daily downtrend line/Weekly envelope + Reaction high).

The pair is in neutral territory.

News

US: ADP employment report remains strong in February

The ADP employment report showed another decent gain in private employment. In February, private employment increased by 217 000, according to the ADP report, while the consensus was looking for an increase by 180 000. The previous figure was slightly upwardly revised to 189 000 (from 187 000). Looking at the details, the service providing sector added 202 000 jobs (from 166 000) and employment rose by 15 000 in goods-producing (from 23 000); of which 20 000 in manufacturing (from 24 000). Employment rose the most in medium (104 000) and small (100 000) size firms, while large firms added only 13 000 workers. The ADP report incorporates the claims data which fell from 447 000 in the week ended January 8 to 385 000 in the week ended February 7, which might be partially explain the strong ADP data. Nevertheless, the ADP report is less pre-cise at capturing payrolls changes at large firms, possibly because they process their own payrolls. This outcome provides further evidence that the US labour market is improving, but we are still looking for confirmation of the official BLS payrolls re-port, which was lagging in the previous months and remained weak. For February, we hope to see some improvement in the BLS report too, partially due to a weather-related rebound.

EMU: PPI jumps at fastest pace since 1982

Euro zone PPI inflation surprised on the upside of expectations in January. On a monthly basis, inflation rose by 1.5% M/M to an annual level of 6.1% Y/Y, significantly above the expected 5.7% Y/Y level. This was the highest monthly jump since 1982, while the annual. The details show that inflationary pressures were led by energy (3.2% M/M), but also prices of intermediate goods (1.5% M/M), non-durable consumer goods (0.4% M/M), durable consumer goods (0.2% M/M) and capital goods (0.2% M/M) rose in Janu-ary. Excluding energy, PPI rose by 0.8% M/M. Although the data are rather outdated, they confirm that price pressures are rising sharply led by higher energy prices

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Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.