USD Gains to Be Tested in Early Week; Can the Rally Continue?
The new week is here and following the extreme market reversals seen in the previous week, it will now be interesting to see if we will get any additional follow through from these moves which ultimately benefited the US Dollar. Markets have since been consolidating in early Monday trade and there isn’t a whole lot to talk about since Friday’s close.
Th Euro had managed to find some support following the denials by various EU officials as well as the Greek government of rumors that Greece was planning on exiting the Eurozone. However, we would take this latest bounce in the currency with a grain of salt as hourly technical studies were already looking quite stretched and a necessary corrective bounce was in the cards for the Euro to allow for these studies to unwind. Elsewhere, the Pound is showing some relative weakness after CBI came out and lowered its 2011 growth forecasts. This follows a string of consistently weak economic data out of the UK in recent weeks. Meanwhile in Australia, business conditions and job ads came in on the positive side but lower than their respective previous prints.
Looking ahead, the focus will continue to be on risk appetite and whether the moves seen in the previous week were legitimate. At this point it is still too early to tell as the markets remain locked in some consolidation. The economic calendar for the remainder of the day is quite light, with German trade numbers, UK Halifax house prices, and Canada housing starts standing out as the main releases. US equity futures and commodities prices are tracking higher led by oil.
EUR/USD: The market has finally succumbed to some heavily overbought readings, with the price dropping significantly over the past few days to trade back below the 20-Day SMA. The daily close below the moving average could be significant and warn of deeper setbacks to come, however, while the market holds above 1.4155, the overall structure remains bullish. Next key support comes in by 1.4280 in the form of the 50-Day SMA, while any rallies should be well capped for now above 1.4600. A bearish outside week in the previous week does offer further evidence of the potential for a more significant move lower.
USD/JPY: Despite the latest slide, we continue to retain a constructive outlook for the market so long as it holds above the daily Ichimoku cloud on a weekly close basis. Ultimately, only a sustained break back below the cloud would negate constructive outlook. A break and close back above 81.00 would confirm outlook and accelerate gains, with daily studies turning up from oversold levels.
GBP/USD: The latest pullback has now resulted in a test of some rising trend-line support off of the late March lows, and as such, we will stand aside for now to see how the market responds to the trend-line. The 50-Day SMA comes in by 1.6285 and a break below would confirm a trend-line break and open deeper setbacks towards 1.6000, while inability to break below the latter would open the door for a resumption of gains initially back towards th 1.6600 area.
USD/CHF:The latest break to fresh record lows below 0.8600 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 0.8500 on a daily close basis, while only a break and weekly close below 0.8500 ultimately delays outlook. Last Thursday’s strong bullish reversal day is encouraging for recovery outlook, though the market will need to continue to extend gains beyond 0.8800 for confidence to build.
Written by Joel Kruger, Technical Currency Strategist
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