- Sentiment shaken in early trade on S&P downgrade
- European Central Bank looking to implement bond purchase program
- G7 meeting shows commitment to keep markets from getting out of control
- Gold very well bid by fresh record highs
It is going to take some time before the dust settles and market participants can fully digest the latest wave of developments which include an S&P downgrade of US credit ratings and news that the European Central Bank is ready to implement a bond purchase program. While the general consensus is that the S&P downgrade will have only a small negative influence on the markets, there are those that feel the symbolic action of downgrading US credit ratings is what the markets will focus on and that this will be what ultimately weighs on sentiment over the coming sessions.
We have already seen the fears of the downgrade spread over to Europe, where France is now at risk for a potential ratings downgrade. A downgrade to France would be devastating for the Eurozone economy, as it would seriously undermine credibility of the EFSF. Early rumors of ECB Spanish and Italian bond purchases was seen rallying the Euro briefly above 1.4400, before the actual ECB statement on the subject proved to be much less committal and a good deal more vague on the subject to once again weigh back on the Euro.
Elsewhere, the Group of Seven was out early Monday attempting to calm markets somewhat after saying that the Group was“committed to taking coordinated action where needed, to ensure liquidity and to support financial market functioning, stability and economic growth. These actions together with continued fiscal discipline would enable long term fiscal sustainability.” The Group went on to add that “no change in fundamentals warranted recent tensions faced by Spain and Italy and that their additional policy measures were welcomed”. The Group concluded that it would“remain in close contact throughout the coming weeks and cooperate as appropriate on financial markets.”
Again, at this point, it would be way to difficult to speculate on market direction over the coming hours and we will need to observe from the sidelines until more clarity presents. Initially, the risk off trade has been winning out, although markets have not entered a mode of panic that some had been expecting over the weekend. Indeed, equity and oil prices are off a good deal in early Monday trade, but the sell-off has been far from catastrophic at this point. Meanwhile, gold remains exceptionally well bid to fresh record highs around the $1700 handle.
EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4450, while only back above 1.4450 delays.
USD/JPY: Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest sharp reversal. The bounce is somewhat significant on a short-term basis, with the market showing just how well it is supported down by 76.00. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. In the interim, any intraday setbacks should now be well supported above 78.00.
GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause, while back under 1.6220 should accelerate declines.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows by 0.7500, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Still, at this point, fading this trend will require some upside confirmation and we would look for a break back above 0.7800 at a minimum to open the door for these reversal prospects and alleviate immediate downside pressures.
Written by Joel Kruger, Technical Currency Strategist
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