The currency markets have seen an interesting reversal in direction between overnight Asian trading and early European morning trading. After falling for session lows overnight, EUR, JPY, GBP and CHF have all reversed their direction.
After falling to a low of 1.3181, the EUR has rebounded towards 1.3250 as the markets await the election results that are expected later this morning. The results should come after 9 am EST. We may be watching a EUR move here that is “buy the rumor, sell the fact”, as most analysts are stating that anything other than a clear win for Bersani’s Democratic Party in the lower house, and a workable Bersani/Monti coalition in the Senate will see pressure resurface in Euro debt markets. This pressure would probably push the currency towards the 1.3000 area. But for now the EUR looks very well bid. Resistance was broken at 1.3220 and 1.3245. Support now is at 1.3190.
The GBP has also ridden the currency roller coaster this morning. After falling to an overnight low of 1.5094, the pound has also rallied, most likely on short covering of an oversold market, following the news late Friday afternoon, that Moody’s downgraded the UK’s sovereign rating from Aaa to Aa1. The reason for this move according to the rating agency was Britain’s weak economic growth, which “poses and increasing challenge to the government’s fiscal consolidation efforts”. Comments made by the Chancellor of the Exchequer on Sunday admitted that “Britain has a debt problem, that has been built up over many years, and we have to deal with it”. The pound was in a oversold situation and the reversal this morning is not that surprising. Resistance at 1.5160 has held and most expect the GBP to retest lower levels of support at 1.5125 and 1.5090.
USD/JPY reached a high of 94.30 overnight after it was reported that Prime Minister Abe is close to nominating former BoJ deputy governor, current Asian Development Bank president Kuroda as the next BoJ governor. In comparison to the other major candidate Muto, Kuroda is seen as the more aggressive one, as he advocated an inflation target more than a decade ago. Also, it should be noted that just earlier this month, Kuroda emphasized the need to end deflation and he noted that BOJ has “really substantial room” for expanding stimulus and easing. The opposition DPL said last week that it would not be opposed to nominees whose names were reported in the press and therefore it is likely that Kuroda would be confirmed. USD/JPY has fallen back below 94.00 and has tested support at 93.80. The market is very short JPY as the CFTC has reported that JPY shorts increased last week to 65,900 from 61,300. The move lower in USD/JPY is explained as profit taking. Most traders still expect a test of the 95.00 sooner rather than later.
The ranges have been defined. It now becomes a waiting game to see if the EUR rebound will hold or if fresh sellers emerge after the Italian election results become know.
Further reading: EURUSD weekly forecast.
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