S&P Downgrades Expose Currencies to Fresh Drop But Correction Still Seen
- S&P downgrades still being absorbed in Monday trade
- Next key support for Euro by 1.2500
- Euro still looking stretched and could be at risk for bounce
- Eyeing key Euro cross rates for potential corrective rallies
While the price action is far from comforting for market participants, there has at least been some consolidation following the latest wave of selling on Friday on the back of the S&P downgrades. But the downgrade of Portugal to junk status and ongoing fear of default out of Greece will keep investors on the defensive and should open the door for additional currency liquidation in favor of the US Dollar over the coming sessions. Next key support for the Euro comes in around the 1.2500 area and a test of this barrier could be seen very soon.
Still, we are not to sure that the Euro declines will extend much further before seeing the first major corrective rally in 2012. While the rating agency downgrades are certainly Euro negative, they have not come out of left field and market participants were anticipating these downgrades for some time already. We believe that a good deal of the Euro weakness in recent weeks had already priced in the downgrades, a development which could mute intensified selling after the actual announcement. CDS and sovereign spreads were already reflecting the potential for the downgrades as well and at the end of the day, the actuality of the downgrades as therefore not as dramatic as some might think.
This by no means is a recommendation to be getting long the Euro at current levels, and ultimately, we remain aggressive Euro bears with a target of 1.2000 Eur/Usd over the coming months, but at the same time, the preferred strategy is to look to be a seller of the Euro and buyer of US Dollars into corrective Euro rallies, rather than selling the Euro in oversold conditions. We continue to also recommend keeping a close eye on some very beaten down and oversold Euro cross rates which include Eur/Jpy and Eur/Aud. At this point, there are no signs of bottoming but we also have a hard time seeing these markets extend much lower before a much needed healthy technical bounce.
EUR/USD: Friday’s aggressive bearish reversal has negated the potential for a double bottom formation in the market and now opens the door for a fresh drop over the coming sessions back towards key psychological barriers at 1.2500. Still, daily studies are looking stretched to us and any additional weakness below 1.2500 is seen limited over the short-term in favor of a decent corrective rally. Back above 1.2880 required to officially alleviate immediate downside pressures.
USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.
GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.
USD/CHF: This market remains very well supported on any form of a dip and looks poised for a fresh upside extension towards 1.0000 over the coming weeks. Look for a daily close back above 0.9600 to confirm and accelerate. Ultimately, any dips should be used as formidable buy opportunities, while only back below 0.9000 would ultimately threaten the recovery outlook.
--- Written by Joel Kruger, Technical Currency Strategist
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