Currencies Back Under Pressure As Risk Negative Themes Dominate Trade
Although currencies managed to rally a bit on Tuesday, most of the gains were classified as corrective consolidation rather than any significant shift in the trend. Overall, the credibility of the Eurozone continues to be challenged and this is a theme which heavily weighs on sentiment. But things haven’t been only gloomy in Europe, with the latest WSJ report saying that the 5 largest US banks face possible liability of at least $17B in foreclosure lawsuits, also doing some damage.
In the end, it seems as though the US Dollar will continue to benefit going forward, with a combination diminished risk appetite and anticipation of the end of QE2 seen driving the Greenback into a more sustainable recovery. The currencies most at risk should therefore be the higher yielding commodity bloc, with the antipodeans in particular showing relative overvaluation and looking very exposed. Data released in Asia was mostly a non-event, although the lower than expected Australia construction release did not help the Aussie’s cause and easily offset any positives from the 1.5 rise in the Westpac/MI leading economic index.
Looking ahead, the election in Greece will be of central importance, and investors are already fearful of a snap result. The economic calendar in the Eurozone is all but empty, with the key release coming in the form of UK GDP at 8:30GMT. US equity futures and commodities are tracking lower on the day.
EUR/USD: The market continues to show signs of weakness following the break below 1.4155 support several days back, and the risks from here are for deeper setbacks over the coming days towards next key support in the 1.3800’s. Look for a clear break below 1.4045 to confirm and accelerate, while any rallies should be well capped ahead of 1.4350.
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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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.