-Euro well supported by 1.3000 for the time being
-Fundamental outlook still favors more risk liquidation
-Solid retail sales puts more pressure of Fed to reverse
-Spanish yields still at elevated levels; Euro bearish
-Spanish auction results well received; German ZEW much better
-UK CPI comes in overall firmer than expected
-RBA Minutes come in on dovish side; more rate cuts ahead
-USD/JPY expected to find support over coming sessions
In Monday’s commentary we warned that the daily close was critical before making any fresh trading decisions and this proved to be an effective strategy, with the break in EUR/USD below 1.3000 failing to generate any initial downside follow through, before a surge into the latter half of the day just shy of 1.3150. We also recommended keeping a close eye on US equity markets, and here too the price action was somewhat ambiguous, with the S&P and Nasdaq closing lower on the day, despite some decent gains in the Dow. Overall, there are still no clear signs of any reason to see a departure from our bullish US Dollar and bearish global macro fundamental outlook discussed on Monday, and we suspect that any rallies in the Euro or equities should soon be met with renewed offers.
Relative performance versus the USD Tuesday (as of 10:30GMT)
US retail sales data was solid, to reaffirm the newly adopted more hawkish Fed slant, while Spanish yields remained above 6% to remind us of the ongoing stress in the Eurozone. We also highlighted our concern of the impact of the China slowdown on commodity bloc and emerging market economies, and the release of the latest dovish RBA Minutes early Tuesday, only helps to strengthen this outlook. The Australian central bank has left the door wide open for additional rate cuts at the upcoming meeting, should inflationary pressures show signs of moderation. The local economy has already been slowing in reaction to the China cool down, and we project more relative underperformance ahead. Therefore, Aussie rallies should continue to be sold in anticipation of a sustained break back below parity over the coming weeks and maybe even days.
For now, we will keep a close eye on EUR/USD. Despite the latest surge, overall price action is still quite bearish while below 1.3215, and only a break and close back above this level would delay the outlook. We would not rule out the possibility for a bit more of a short squeeze on Tuesday towards 1.3200, but any rallies beyond the figure should be well capped. The market has also found some renewed interest on Tuesday following a much better then expected German ZEW and some well received Spanish auction results. A break back below 1.2990 will really put the pressure on the downside and likely leads to an acceleration of broad risk liquidation that opens an immediate retest of the early 2012 lows by 1.2660. Also out in European trade was UK inflation data which managed to come in slightly firmer than expectation.
Elsewhere, it will be interesting to see how USD/JPY responds from here. While there are still remnants of correlation with risk off price action to Yen outperformance, we contend that this correlation has more or less faded, and as such, any additional strength in the Yen from here should be met with strong offers. USD/JPY has dropped back into the 80.00 area, and the correction off of the 2012 highs by 84.20 could be close to reaching its course. Technically, the pair is now testing some solid support by both the daily and weekly Ichimoku cloud tops, and we will be on the lookout for a bullish resumption over the coming sessions.
EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines.
USD/JPY: The market continues to correct from the recent 2012 highs established at 84.20 several days back, and risks still exist for additional setbacks into the 79.00-80.00 area before considering a bullish resumption. Overall, our outlook is highly constructive and we see the pair in the process of carving a longer-term base ahead of the next major upside extension into the 85.00-90.00 area. We would therefore expect to see the shaping of a fresh medium-term higher low over the coming days somewhere in the 79.00-80.00 area. Ultimately, only below 78.00 delays outlook and gives reason for concern.
GBP/USD: Failure to establish any fresh momentum on the recent break above 1.6000, followed by an aggressive bearish reversal, now suggests that the market could finally be looking to carve a top in favor of a more significant decline over the coming sessions. Look for a break and close below next support at 1.5800 to reaffirm outlook, while back above 1.6065 would be required to negate.
USD/CHF: Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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