Euro Now Contemplating Retest of Psychological Barriers; Will Offers Emerge
The dynamic of the FX market has certainly changed over the past few days and what was once a corrective bounce in currencies has now turned into a potential legitimate rally against the Greenback. While Eurozone fundamentals have improved and the region is gaining a better hold on the debt crisis, we are still unsure whether the current rally is completely justified given that nothing that much has really changed in our opinion. Nevertheless, our opinion is irrelevant and the markets will do what the markets will do. Right now it seems as though the prevailing flows are intent on continuing to pressure the US Dollar until proven otherwise. At this point, the proximity to psychological barriers by 1.4000 is certainly a factor and many will now be focusing on a test of this level over the coming sessions.
The broader price action has resulted in a Swiss Franc that is on the verge of establishing fresh record highs against the buck, and a Canadian Dollar that is contemplating a rally to its own fresh multi-month highs. Meanwhile, both the Yen and Australian Dollar are inching nearer to their record levels. Risk appetite and surging US equities have been a major influence on the currency rally, but here too we are somewhat skeptical, particularly in reference to the Australian Dollar which seems to be more exposed given some softer economic data of late and lower inflation readings. The latest data out from the antipodean has produced a weaker HIA new home sales print and this in conjunction with a category 5 cyclone that is set to hit Queensland (already hit by severe flooding in recent weeks), leaves us quite bearish on the Australian Dollar on a relative basis.
Technically, we find that when markets are trending in one direction, Wednesday’s are often a very good day for reversals to take hold. It seems as though the midpoint position within the week is used as a logical level for some profit taking. While there is no indication of any such reversal just yet, we think it is a point worth mention. Additionally, we have also been seeing a subtle reduction in retail Euro shorts which could actually suggest that the market is indeed poised for a bearish reversal. Again it is too early to tell, but definitely worth noting.
Looking ahead, the economic calendar in European trade is quite light with UK construction PMI (49.5 expected) out at 9:30GMT, followed by Eurozone producer prices (0.7% expected) at 10:00GMT. US equity futures and commodity prices have been consolidating their latest moves. The ability for US equities to continue to drive higher and remain so well bid can not be ignored and this is certainly playing a major role in the broader global macro price action.
EUR/USD:The bearish reversal day from last Friday has now been completely negated with the market racing back above 1.3760. While we would not get overly bullish at current levels, the break and close back above 1.3760 on Tuesday could very well open a fresh upside extension towards 1.4000 (78.6% fib retrace off of the Nov-Jan move comes in by 1.3980). However, inability to establish above 1.3800 on Wednesday would suggest that price action is somewhat exhausted and could set up a short-term topping formation. As such, the preferred strategy is to stand aside for now until a clearer signal presents.
USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Tuesday’s daily close back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while only back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.
GBP/USD: The market has been very well bid since reversing sharply in the previous week, with the rally now totally negating any short-term bearish sentiment following the break back above 1.6060. From here, there is scope for a complete retracement of the Nov-Dec high-low move, with a potential retest and break of 1.6300 over the coming sessions. A break and close back below 1.6000 will now be required to officially relieve topside pressures.
USD/CHF: The market has failed to hold above the 0.9400 figure as we had wanted with Tuesday’s daily close back below the figure now exposing a retest and break of the 31Dec record lows by 0.9300. A clear break and close below 0.9300 will open a fresh downside extension eyeing next major psychological barriers by 0.9000, while inability to establish below 0.9300 will suggest that the market is still attempting to base out in favor of an eventual longer-term rally out from major cycle lows. In the interim, we remain sidelined and will wait for a clearer signal.
Written by Joel Kruger, Technical Currency Strategist
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