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French Downgrade Rumors Unsubstantiated; Euro Well Supported

By Joel Kruger, Technical Strategist
22 December 2011 11:54 GMT

  • Markets could continue to see whipsaw trade into year end
  • Euro still open for rally towards 1.3300 over coming sessions
  • Euro crosses looking overextended and poised for bounce
  • UK GDP slightly better but offset by record current account deficit
  • Batch of US economic data to be absorbed in Thursday trade

Although yesterday’s price action in the Euro was quite bearish, with the market unable to hold onto gains towards 1.3200 and sharply reversing course to close lower on the day back in the mid-1.3000’s, we would not give the developments too much consideration in the current market environment. All of the major players have abandoned their desks for the holidays and market volumes have dropped off dramatically. Technically, we still do not rule out the possibility for a Euro rally into year end, with the market well capable of pushing back into the 1.3300’s while still being confined to the underlying bearish trend. But our recommendation is to stay put on the sidelines for now and wait until normal market conditions return in early January.

Relative performance versus the USD on Thursday (as of 12:40GMT)

  1. AUD +0.35%
  2. NZD +0.29%
  3. CAD +0.24%
  4. EUR +0.13%
  5. GBP +0.12%
  6. CHF -0.01%
  7. JPY -0.04%

In the interim, it could be worth keeping an eye on some interesting Euro cross rates which all seem to be overextended and potentially at risk for reversals. EUR/JPY has stalled out yet again by multi-year lows and ahead of key psychological barriers at 100.00, while EUR/AUD trades by +20 year lows and could also be looking to carve some form of a base. Meanwhile, EUR/GBP has been under some intense pressure in recent trade, and threatens a retest of its 2011 lows from early January.

In trade thus far on Thursday markets have been jittery, with the Euro once again initially bid and then pulling back on rumors of a French downgrade. However, after failing to materialize, the market was once again supported on dips and bid back into the North American open. UK was the standout in Europe with GDP coming in slightly better but more than offset by the worst ever UK current account reading. Looking ahead, things could pick up into the US with the final revisions to US Q3GDP due, along with initial jobless claims, Chicago Fed national activity index, leading indicators, the house price index and Michigan confidence. US equity futures and oil prices are marginally bid while gold track slightly lower.

ECONOMIC CALENDAR

French_Downgrade_Rumors_Unsubstantiated_Euro_Well_Supported_body_Picture_5.png, French Downgrade Rumors Unsubstantiated; Euro Well Supported

TECHNICAL OUTLOOK

French_Downgrade_Rumors_Unsubstantiated_Euro_Well_Supported_body_eur.png, French Downgrade Rumors Unsubstantiated; Euro Well Supported

EUR/USD: The market has finally taken out the key October lows at 1.3145 to confirm a lower top by 1.3550 and open the next downside extension towards the 2011 lows from January at 1.2870. Daily studies are however looking a little stretched and at this point we could see some corrective action before the market resumes its downward trajectory. Look for any rallies to be well capped in the 1.3300 area from where the next lower top will be sought out.

French_Downgrade_Rumors_Unsubstantiated_Euro_Well_Supported_body_jpy2.png, French Downgrade Rumors Unsubstantiated; Euro Well Supported

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

French_Downgrade_Rumors_Unsubstantiated_Euro_Well_Supported_body_gbp2.png, French Downgrade Rumors Unsubstantiated; Euro Well Supported

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5400 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

French_Downgrade_Rumors_Unsubstantiated_Euro_Well_Supported_body_swiss1.png, French Downgrade Rumors Unsubstantiated; Euro Well Supported

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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22 December 2011 11:54 GMT