The key mover of the European session so far has been USDJPY. After wobbling a little on Friday afternoon as the market digested what the labour market data from the US meant for the future of Fed policy, the greenback has recovered and USDJPY is the chief beneficiary. It broke above 93.00 at one point today, its highest level since mid-2010. The cross is looking extremely overbought on a daily and weekly basis, however we don't think this signals that a major sell off lies ahead, rather that further gains may be incremental. Indeed, after hitting a high of 93.20 earlier today USDJPY is running into short term resistance. We expect 92.80 then 92.50 to act as support and for any pullbacks to be shallow as we believe this rally has further go in the medium-term and that the Japanese authorities won't ease off the downward pressure on the yen anytime soon.
Spanish political news hits the euro
Along with the yen, the euro is the weakest performer today on a broad-based basis. EURUSD is back below 1.36 after being hit by bad news on two fronts: 1, weekend reports of political tensions in Spain after the opposition leader called for the PM to stand down after reports of fraud surfaced in the media, and 2, Sentix investor confidence rose less than expected in January to -3.9 from -7.0 in December, the market expected a stronger recovery to -1.7. This is a good metaphor for the wider Eurozone: the risk of disappointment is high as the recent rally seems to rely on the stabilisation in the currency bloc to continue.
Interestingly, although Spanish yields have been rising since mid-Jan when they fell below 5%, the euro had been resilient to this and managed to continue to extend gains. Today the euro is declining as Spanish bond yields rise to a touch below 5.4%, their highest level for 6-weeks. Thus, it is unlikely the euro could ignore the effects of rising sovereign risk in Spain in the near term. So far this year Spain has managed to sell debt extremely easily, however the rise in yields could complicate the long-term bond auction due to take place on Thursday.
CFTC sentiment - markets still long euro, but maybe less euphoric
But while the fundamental argument may support a weaker euro, the key to successful FX trading is understanding the current market sentiment. This is where CFTC positioning data comes in handy. It reports non-commercial (i.e., speculative) positions in the euro vs. the dollar. It moved back into positive territory at the start of January, and short positions had declined since the end of November. Interestingly, long positions jumped by 14,000 contracts between the second and third week of January, however the number of long contracts rose by only 6,000 in the last week of January. While this isn't the only source of demand for the euro, it is worth monitoring. If we see speculative interest in the euro start to tail off it could be a sign that EURUSD has reached a top.
Can stocks keep up the pace set in January?
Stocks got off to a weak start in February after the best January performance for more than 20 years for some markets. European markets are down nearly 1% so far today. There isn't too much economic data to give markets direction today, and although stocks have been falling we think that the downside may be limited. Support in the Eurostoxx index is 2,665, the low from mid-January. We could range trade into the ECB meeting later this week between 2,650 and 2,750 - this level saw a shooting star daily candle pattern last week, which suggests a temporary top may be in place.
One to watch: Eurostoxx index - a clear range has developed. A break below 2,665 -the recent low - opens the way for a move back to 2,600 in the short term. Added to this the daily RSI, a key momentum indicator that you can see in the chart below, has also pointed lower, which suggests there could be some selling pressure in the near term.
Eurostoxx - daily chart
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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