After yesterday’s major rally that pulled the EURUSD back above 1.2300 and sent other high beta currencies parabolic, the US Dollar has consolidated its losses, falling a mere -0.09% on the day thus far. Notably, this comes as market participants question yesterday’s commentary by European Central Bank President Mario Draghi. President Draghi alluded to a major European Central Bank bond buying program, stating that pressure in sovereign yields has disrupted the central bank’s policy transmission mechanism, and capping yields (in Italy and Spain, notably) would help restore effective monetary policy.
However, considering that Article 123 of the Treaty on the Functioning of the European Union explicitly forbids such measures, and that the Bundesbank (Germany’s central bank) has stated today that a bond buying program would violate its mandate, much remains to be seen as to the credibility of such a program. Nonetheless, with a European Central Bank Rate Decision on August 2, French newspaper Le Monde has reported that the European Central Bank is indeed preparing a major program to support Italian and Spanish bonds; expectations are riding very high on an announcement and without one, all of Thursday’s gains will be easily erased and then some.
While there’s been weakness in the Euro today, peripheral European sovereign yields have continued to improve, most notably in the important larger countries, Italy and Spain. The Italian 2-year note yield has dropped to 3.839% (-14.5-bps) while the Spanish 2-year note yield has sunk to 5.196% (-22.0-bps). Accordingly, the Italian 10-year note yield has fallen to 5.941% (-6.8-bps) while the Spanish 10-year note yield has contracted to 6.776% (-5.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:08 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.09%(-0.74% past 5-days)
The week concludes with a bang as the initial second quarter USD Gross Domestic Product (Annualized) report is due out at 08:30 EDT / 12:30 GMT. With a Federal Reserve policy meeting scheduled to take place next week, today’s US GDP report is particularly important when considered in the context of whether or not the Federal Reserve will ease more. Given the recent downturn in the housing, labor, and manufacturing sectors, it has become widely expected that the Federal Reserve will implement a third round of quantitative easing at some point in the coming weeks.
Nonetheless, the results of today’s US GDP report could mirror the US Nonfarm Payrolls report for May released on June 1: a strong figure will prompt a rally by the US Dollar as well as by US equity markets; or a weak print will prompt a US Dollar sell-off as well as a sell-off in US equity markets.
EURUSD: The EURUSD ran into the key 1.2310/30 resistance level and has since pulled back, an expected occurrence as noted yesterday. After trading towards interim support at 1.2220/45 (revised from yesterday’s resistance at 1.2220/40), the pair has since bounced. Today’s price action has thus far yielded an Inside Day, which on a near-term basis suggests that the rally has found some pause and the trend may reverse. Resistance comes in at 1.2310/30 (weekly high set yesterday) and 1.2375/90. Support comes in at 1.2220/45, 1.2155/70, and 1.2110/20. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875.
USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. Watch the 5-DMA (78.35) for advances; the USDJPY hasn’t closed above the 5-DMA since July 11.
GBPUSD: While an Inside Day is forming today after yesterday’s rally, we note that the GBPUSD is pushing its daily and weekly highs at the time this report was written. For now, the key level to the topside is 1.5735/45 (July high, 200-DMA). Above, resistance is close at 1.5775/80 (Bollinger Band, 100-DMA). Failure to break these levels should lead to a sharp pullback towards major support confluence in the 1.5575/1.5605 zone (former channel resistance, 10-DMA, 20-DMA, 50-DMA). A daily close below this zone exposes the weekly lows at 1.5455/60.
AUDUSD: The march towards 1.0500 continues as the pair has eclipsed yesterday’s high and is lining up for a test of 1.0440/45 (July high). An hourly close above this level should lead to an intraday test of 1.0480, and ultimately, 1.0490/1.0505 (channel resistance). Considering the price action in the EURUSD today, we expect that the US Dollar stands to gain, so rallies into 1.0490/1.0505 should be sold. Near-term support comes in at 1.0380/85, 1.0310/30, 1.0245/65, 1.0210/15, then 1.0170/90.
--- Written by Christopher Vecchio, Currency Analyst
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