Commodity Bloc Expected to Underperform As Gold, Oil and Equities Falter
It is truly impressive that the Euro remains so well bid despite the latest bout of negative developments on the Eurozone peripherals, and market participants continue to price in the likelihood for a rate hike at next week’s ECB meeting. ECB president Trichet has said that inflation is beginning to show signs of being “durable” and this has been taken as a further proof that the central bank will indeed act when it meets next week.
Meanwhile, commentary from Fed officials has been rather upbeat and on the hawkish side, but this is not having any favorable impact on the buck as of yet. Clearly, this upcoming NFP and unemployment data due out on Friday will be important, and any sign of continued improvement in those numbers could help to spark some USD bullish momentum.
Elsewhere, while the Swiss Franc and Yen have reigned in volatility after breaking to record highs against the US Dollar, things have been more active on the commodity bloc, with these currencies outperforming in recent trade. But we have a hard time seeing how these currencies can continue to outperform going forward, especially with gold, oil and US equities pulling back. In fact, after putting in a fresh post float record high by 1.0315 on Monday, Aud/Usd has pulled back quite a bit with a bearish gravestone doji like formation to suggest that we could be in the process of carving out a top.
Aud/Usd Daily Chart
Finally, the Pound remains relatively well offered as market participants scale bank interest rate expectations following a slew of disappointing economic data and less than hawkish central bank commentary. Any fears over the threat of inflation have been mitigated by the Bank of England, and this leaves markets still very much focused on the recovery in the local economy. UK GDP data is due out in a bit and any additional weakness in this data series could put more pressure on the Pound.
Looking ahead, the 8:30GMT UK data takes center stage in European trade, while the ongoing crisis in the Eurozone should also be a source of volatility for the session. US equity futures are tracking slightly higher, while commodities are moving in the opposite direction.
EUR/USD: A closer look at the weekly chart shows the market failing ahead of some key resistance from November 2010 at 1.4280 and reversing to confirm a bearish weekly close and break of a sequence of 5 consecutive weekly higher lows. This certainly warns of the potential for deeper setbacks ahead, and we initially will look for a daily close back below 1.4050 to provide further confirmation for reversal prospects. The 1.4050 level loosely coincides with some rising trend-line support off the 2011 lows and a daily close below this level could accelerate declines towards next key support by 1.3750 further down. Back above 1.4250 delays.
USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.
GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. As we had warned in the previous daily analysis, the market has once again rejected trading above the figure to set up a bearish reversal exposing deeper setbacks into the 1.5700 area over the coming sessions. Ultimately, only back above 1.6300 delays.
USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.9100 on a daily close basis, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.
Written by Joel Kruger, Technical Currency Strategist
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