EUR Relief Rally without Teeth

Today brings forth some modest bounces in all asset classes. It can so, only because of the depth of shellacking they have experienced of late. All just in time and ahead of reports on American consumer confidence and home sales later this morning. Market sentiment has been turning on a dime and will be continued to be dictated to by euro-zone news, economic data points and US corporate earnings. That said, the EUR traded within a whisker of breaking through most individuals psychological barrier again yesterday (1.31). The result for not doing so is a market again determined to flush out ‘stale’ shorts ahead of the two-day FOMC meet starting today.

Last week saw the beginning of policy signals and tone from various G10 members beginning to change. With hawkish or more accurately ‘less dovish’ policy tones from the BoE, BoC and Swedish Riksbank has fixed income traders reducing expectations for further easing. It was only a few month ago that all Central Bankers were waving the same flag, now we have policy divergence. FX traders have only just got their heads around Euro-periphery yields, now they will have to widen that scope.

Regarding the Fed, they remain a nonstarter in the rate change, but have a lot to say. Bernanke’s press conferences tomorrow will be heavily scrutinized for any QE3 rhetoric. Does the US retail sales print last week finally put a nail into Q3’s coffin? Policy makers will update their set of projections on GDP, inflation and employment. The hawkish minority will have likely moved forward their call for the first Fed rate hike and investors are looking for signals.

The EUR FX market seems to be unsure whether the euro-zone requires more ‘austerity as opposed to economic stimulation.’ It is being put forth that the lack of market volatility could be considered as a ‘stalemate’ between the two sets of thoughts. For sure, these tight consolidated ranges to do not provide much alternative thought. All the noise and action continues to be carried on “around” the current EUR trading range as consolidation persists intraday within the recent range.

The market bias remains the same, with investors willing to set shorts on any market rallies while prices remain below last summers trend line of 1.3350. The prospect of a multiyear low ECB rates and the recent expansion of their balance sheet through the 3-year LTRO program is likely to keep front rates under pressure, tightening the EUR/G10 spread in favor of other currencies with the dollar being the dominant choice. Immediate dollar strength will be relying on continuing improved data flow and the ECB and BoJ expanding their balance sheets.

Decent Dutch (1.9b 2’s), Spanish (1.93b Bills) and Italian (2.5b Bond) auctions results today have temporarily trumped growth and political instability worries. Obviously the most significant issue was the Dutch as it was taken down just after a divided political weekend. Investors will continue to view this as a EUR relief rally without teeth unless resistance is firmly broken or the slew of weak PMI’s right themselves.

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EUR Bears Have Momentum