- End of month flows could influence trade
- Euro risks still tilted to upside with focus on establishment above 1.3500
- Yen stabilized after bout of intense selling
- Global equities remain very well supported but still see risks for pullback
- ECB LTRO on Wednesday remains in focus
We are in the final days of February and markets always have an added tendency of additional volatility on the end of month flow-related activity. This aside, the Euro remains very well supported on dips and continues to focus on the establishment above next key barriers by 1.3500. While we retain a broader bearish bias in EUR/USD, we still see risks for additional gains into the 1.3600-1.3700 area before the market finally relents.
Elsewhere, the Yen has found some renewed bids, albeit most of these bids are probably related to profit taking on short positions, with Monday’s Yen rally seen as a necessary development given how well offered the currency had been, trading to multi-month lows against the buck. Still, we continue to see the risks for the Yen tilted to the downside from here, with every indication that the currency is carving out a major top against many of the major currencies.
Moving on, the ability for global equities and risk sentiment to remain so well supported has us frustrated at the moment, as technical signs continue to warn of a near-term pullback which should be rather sizable. Inability for equities to roll over to this point has once again helped to put the bid back into the higher yielding, risk correlated commodity currencies which managed to outperform on Monday. Also seen supporting the commodity currencies on Monday was news that Singapore’s Wilmar will be taking a 10.1% stake in Australia’s Good man Fielder. But at this point we will not waver from our convictions and will continue to be on the lookout for the expected bearish shift in global sentiment.
Simmering geopolitical tensions between Israel and Iran represent a risk to market sentiment and stand to impact oil prices. Additionally, IMF Lagarde has been on the wires warning that the global economy is “still not out of the danger zone,” and these comments could invite more uncertainty to the marketplace on Tuesday. Looking ahead, Wednesday’s ECB LTRO remains in focus and the results will surely have an impact on directional movement in the markets.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: The latest break and daily close above 1.3325 ends a recent bout of multi-session consolidation and now opens the door for the next upside extension towards the 1.3600-1.3700 area over the coming days. While our broader outlook remains aggressively bearish with a downside target by 1.2000 in 2012, the 2012 correction within the broader downtrend off of the 2008 record highs is still in play, and shows potential for additional gains. Still, we prefer to remain sidelined as our bearish bias has us looking for opportunities to sell rather than attempting to buy into a corrective rally within a broader downtrend. We would also not rule out the possibility for a topside failure ahead of 1.3600-1.3700, but given the latest break, the risk for additional gains seems like a very real possibility that needs to be considered and anticipated. Back under 1.3350 will be required at a minimum to alleviate immediate topside pressures.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 80.00 over the coming sessions could prove short-lived with technical studies rolling from their most overbought levels in over 10 years and warning of some additional corrective declines towards previous resistance now turned support by 78.00 before bullish continuation.
GBP/USD: Overall, the market remains locked in a choppy consolidation with setbacks more or less supported by the 100-Day SMA and rallies well capped towards the 200-Day SMA. The market has been bid in recent sessions to open a test of the 200-Day SMA, but a break and close above the longer-term SMA will be required to force a directional shift in the structure. Best to stand aside now and wait for a clearer signal while the market chops around.
USD/CHF: The market remains under some intense pressure since topping out by 0.9600 back in late December/early January, and risks from here are for deeper setbacks over the coming sessions, potentially towards the 200-Day SMA by 0.8800 before eventually stalling out. However, our broader outlook remains bullish and we will be on the lookout for the formation of the next medium-term higher low ahead of a fresh upside extension back through 0.9600 and above parity. Ultimately, only a break back below 0.8550 would compromise outlook and give reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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