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ECB Event Risk Could Help Determine Broader Market Direction

ECB Event Risk Could Help Determine Broader Market Direction

2011-02-03 07:53:00
Joel Kruger, Technical Strategist

The markets have been relatively quiet on Thursday into the European open with most of the major currencies consolidating their latest moves and locked in holding patterns ahead of the next source of volatility. Later today the ECB will come out with a decision on interest rates, and although the actual rate will almost certainly be left unchanged at 1.00%, all eyes will be on European Central Bank President Trichet for any clues at future direction of monetary policy. Recent comments from the central banker relating to inflation have helped to bolster the Euro and it will be interesting to see if he goes ahead and reaffirms his concerns over rising inflationary pressures.

For now, the Euro has stalled out ahead of 1.3900 with good supply seen ahead of the figure aided by more news of geopolitical risk out of Egypt on reported bloodshed from the political upheaval, and words from a German government source that the country is against the EFSF rescue fund buying bonds from beleaguered Eurozone economies. Meanwhile, on the other side of the coin, Fed Duke has not been helping the US Dollar’s cause at all after coming out overnight and talking of possible Q3 ahead. Technically, we have seen most of the major currencies stall out to potentially warn of some form of a top against the buck, but we still need to see some downside follow through on Thursday to confirm reversal prospects in favor of the Greenback.

Elsewhere, the antipodean currencies have been moving in opposing directions on Thursday, with the Australian Dollar bid up on the back of some much stronger building approvals and a less damaging cyclone impact, and Kiwi well offered following a disastrous unemployment rate which came in at 6.8% after the market had been looking for a 6.5% print.

Looking ahead, the European calendar is packed with PMI data which includes UK PMIs, while UK official reserves and Eurozone retail sales are then out at 9:30GMT and 10:00GMT respectively. All eyes then turn to the ECB rate decision at 12:45GMT, followed by US initial jobless claims, continuing claims, non-farm productivity and unit labor costs at 13:30GMT. US ISM non-manufacturing is then out at 15:00GMT, along with factory orders. On the official circuit, Fed Chair Bernanke is slated to speak at 17:30GMT. US equity futures are unched, while oil and gold move in opposite directions, with oil higher and gold lower.


EUR/USD:Rallies have stalled out for now ahead of 1.3900, with the market reversing mildly on Wednesday to put in a bearish doji-like close. From here, there is a risk for the start of a pullback, but a break and daily close back below 1.3765 will be required to confirm and officially relieve short-term topside pressures. A daily close back above 1.3860 will negate reversal prospects and open the door for the next upside extension towards the 1.3980-1.4000 area (78.6% fib retrace/psychological barrier) further up.

USD/JPY: Despite the latest setbacks below 82.00 which have put the pressure back on the downside, the market remains well bid on dips towards 81.00. A break and close back below 81.30 on Thursday will open the door for fresh downside towards the multi-year lows from late 2010 by 80.25, but at the same time, should the market manage a close back above 82.00, we could see yet another successful basing attempt with the potential for a more significant recovery back towards and eventually beyond 84.50. In the interim, best to stay on the sidelines 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. However, a break and close back below 1.6125 will officially relieve short-term topside pressures and open the door for a potential bearish resumption.

USD/CHF: Although the market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows on Wednesday followed by a break back above 0.9400 leaves us somewhat constructive with our outlook from here. Look for a break and close back above 0.9445 on Thursday to confirm bullish bias and accelerate gains. Back below 0.9300 will of course negate outlook and give reason for pause.

Written by Joel Kruger, Technical Currency Strategist

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