Currency Rally Expected to Stall Out In Favor of Fresh US Dollar Buying
The market correction in currencies that we had been talking about in recent days has been playing out, with the Euro breaking back above 1.4300 on Thursday and poised for a little more upside. However, any additional gains from here are seen as limited, with the greater risk for a lower top in favor of the next major broad based upside extension for the buck.
There is very little to talk about so far on the day, with Sterling continuing to underperform on the back of a weaker employment report on Wednesday. Nationwide consumer confidence has also just come out and this data is also weaker, to put added pressure on the Pound. The softer economic data out of the UK has done a good job of discouraging those in the hawkish camp, and it doesn’t look as though the Bank of England will be raising rates any time soon. UK retail sales is the big economic release in European trade today, and the data will need to exceed expectation for bulls to find any relief.
Elsewhere, the topic of Greece and its “soft restructuring” remains at the forefront of investor minds’, with fears of contagion intensifying in recent days. European Central Bank President Trichet will be on the wires today discussing European integration and stability, and as always, the central banker will have the opportunity to move markets. Also out on the official circuit today will be Bank of England’s Tucker and Bean, while in the US, speeches are due from Fed’s Dudley, Fisher and Evans.
On the data front, Aussie weekly earnings rose but at a slower pace than the previous print. Meanwhile, in New Zealand, the 2011 and 2012 budget was released with the government outlining an austere set of measures to return to a budget surplus by 2014/15. Nevertheless, Fitch maintains its negative outlook on New Zealand’s sovereign rating, but did concede that the budget looked appropriate given the circumstances.
Looking ahead, as mentioned above, UK retail sales will be the big release in Europe, with the Swiss ZEW and UK CBI also out in the session. In North American trade, US initial jobless claims, existing home sales, leading indicators and the Philly Fed will be in focus. US equity futures and commodities prices are trading flat into the European open.
EUR/USD: The corrective rally out from 1.4050 continues with the market breaking back above 1.4300 thus far. However, any additional gains from here should limited to the 1.4400-1.4500 area, and we would be looking for the formation of a fresh lower top in favor of the next major downside back below 1.4050. Ultimately, only a daily close back above 1.4500 would delay.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days.
GBP/USD: The market is starting to give way, with the price now dropping back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks below 1.6000, with any rallies now expected to be well capped ahead of 1.6400. Ultimately, only back above 1.6520 gives reason for concern.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close for two consecutive weeks and breaking back above the previous weekly high. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
Written by Joel Kruger, Technical Currency Strategist
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