Another quiet session on Thursday as volumes remain depressed across the globe amid the summer holidays. However, we believe that market participation rates should begin rising again in the coming days now that German Chancellor Angela Merkel has returned from vacation. Accordingly, the European sovereign debt circuit heats up next week when French and German leaders will convene with Greek Prime Minister Antonis Samaras to discuss the failed Greek state, and what needs to be implemented in order to move closer towards a third bailout for the embattled Southern European sovereign.
Meanwhile, whatever knock-on effect the crisis is having on the British Pound may be returning, with the EURGBP falling to its lowest level in over two-weeks. In part, this comes after the British economy had its best Retail Sales report in four-years in July, suggesting that consumption is on the rise. Alongside comments made last week by Bank of England Mervyn King that further accommodative measures via rate cuts might prove ineffective, there is something to be said about a bullish Sterling outlook, at least in the near-term. Nevertheless, and as detailed below, our bias for the GBPUSD remains neutral as the five-day ATR has hit its lowest level (72.0-pips) since May 4. All things considered, the GBPUSD dropped nearly 1000-pips in the ensuing four-weeks (from 1.6174 to 1.5268 on June 1).
With the Euro’s correlations to short-term Italian and Spanish bond yields back on the rise, there is little doubt that the Euro’s weakness today is related to yields rising again. The Italian 2-year note yield has risen to 3.348% (+8.0-bps) while the Spanish 2-year note yield has moved higher to 4.031% (+4.7-bps). Likewise, the Italian 10-year note yield has climbed to 5.817% (+7.7-bps) while the Spanish 10-year note yield has fallen to 6.517% (-6.7-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:27 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.12% (+0.36% past 5-days)
There are a few events on the calendar that pique our interest and they are all from the US. At 08:30 EDT / 12:30 GMT, the USD Initial Claims for the week of August 11 will be released, and the report should show a small uptick, which could pressure the US Dollar. Also due are USD Building Permits and USD Housing Starts, with the former showing modest growth and the former showing a slight contraction. At 10:00 EDT / 14:00 GMT, the USD Philadelphia Fed Index for August is due, which is expected to rebound back to its highest reading since May.
BB represents Bollinger Bands ®
EURUSD: More sideways to downside price action in the EURUSD as the pair trickles lower amid thin trading conditions. The rally off of the July 24 low appeared to be corrective in nature, with three waves evident from the bottom (A-B-C correction). However, despite declines from the highs, we suspect that there is some support upcoming, given the ascending trendline off of the July 24 and August 2 lows, as well as former swing lows, at 1.2250/65. Any rally from this area should be sold; it is possible that a rebound here would mark a Bull Flag on the daily chart. Overall, however, we look for one more new low near the 2010 low of 1.1875 before the start of the next major bull leg (towards 1.3000). A drop towards 1.1695-1.1875 remains likely by mid-September. Interim resistance comes in at 1.2310/30, 1.2400/05, and 1.2440/45. Near-term support comes in at 1.2250/65, 1.2155/70, and 1.2130/35. The Inverse Head & Shoulders (Head at 1.2040/45, Neckline at 1.2400/05, Measured Move 1.2750/60) remains a potential outcome.
USDJPY: A string of better than expected US data has shifted the fundamental bias of this pair, and indeed, the Rounded Bottom on the hourly charts has materialized a bullish outcome, as expected. This could be the first step towards the USDJPY Inverse Head & Shoulder formation playing out. With the Head at 77.60/70 and the Neckline at 80.60/70, this suggests a measured move towards 83.60/70 once initiated. The daily close above 78.60 yesterday, in our opinion, brings near-term resistance in focus at 79.15/20 (200-DMA). With the pair trading above this level today, a daily close above brings into focus 79.65/70 (100-DMA). Interim support comes in at 78.60 (former swing lows) and 78.10/20 (lows from the past week).
GBPUSD: The muddle sideways continues, leaving little changed of our outlook for the GBPUSD. Overall, our outlook is little changed from Monday [August 6]. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5595/1.5600 (50-DMA, short-term channel support) would be bearish, whereas a close below 1.5490/1.5520 (former swing lows) would be very bearish (as it would represent a break of the channel as well as the August lows). Near-term resistance is 1.5700/05 (August high), 1.5715/20 (200-DMA), and 1.5755/70 (July high, 100-DMA). Daily support is 1.5625/40 (10-DMA, 20-DMA) 1.5575/80, 1.5490/1.5520, then 1.5450/60 (July 25 low).
AUDUSD: The top that we posited that was forming on the 4-hour charts is close to being confirmed, now that prices have broken below 1.0500; ideally, a daily close below 1.0435/40 (August low) would confirm. At current price, near-term support comes in at 1.0435/45 and 1.0380/85, though with shorter-term timeframes showing exhaustion, we suspect a bounce could be had first. Near-term resistance comes in at 1.0480/1.0500, 1.0535/45 (former swing highs), 1.0580, 1.0600/15 (August high) and 1.0630.
--- Written by Christopher Vecchio, Currency Analyst
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