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Talking Points:

- Risk aversion continues to show across global markets as driven by political volatility in Italy. At this point, it appears as though another round of elections are in the country’s future, and this has become a de facto referendum on Italy’s continued role in the Euro-Zone. Also of interest – Spanish Prime Minister Mariano Rajoy is headed for a no-confidence vote on Friday, so uncertainty reigns supreme around European politics at the moment.

- Yesterday was a holiday in the US and UK, and equity markets are playing catch-up after yesterday’s Euro-based selling. US equity futures are pointing towards a gap-down on the open, and this will keep themes of risk aversion in the spotlight for the immediate future. For currency traders – look to the Japanese Yen for safe-haven plays, with particular interest around pairs like EUR/JPY and GBP/JPY.

- DailyFX Forecasts have been updated for Q2, and are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

EUR/USD Sets Fresh Ten-Month Lows as Politics Steals the Spotlight

European assets continue to get hit as markets attempt to price-in additional political risk from recent events in Italy. The difficult aspect of that is that this is a very fluid situation, and at this stage, we still don’t know what to actually price in. It appears as though we’re heading for another round of elections in Italy. And at this point, it appears as though this next election will deductively become a referendum on Italy’s continued membership within the European Union. Taking matters a step further, it appears as though a similar situation is brewing in Spain…

In Spain, Prime Minister Mariano Rajoy will face a no-confidence vote this Friday. The major fear is that an ouster would bring the same type of turmoil and uncertainty that we’re currently seeing in Italy. Most analysis that I’ve read thus far indicates that minority parties are too split and disorganized to stage a coordinated campaign against Rajoy that may actually work to his ouster, but if the past few years have taught us anything, it’s that politics and elections can be just as unpredictable as markets.

Out of fear, or perhaps anticipation – European markets have continued to get rocked. The Euro is continuing to drop, and European equity markets are showing very bearish price action. On Friday of last week, we looked at a bearish engulfing formation in the DAX, and that move has continued as sellers remain aggressive in this week.

DAX Weekly Chart: Last Week’s Bearish Engulfing Leads to This Week’s Sell-Off

German DAX Weekly Chart

Chart prepared by James Stanley

Catching up with the action this morning are British and American markets, both of which were closed for holidays yesterday. The FTSE100 had posed a similar bearish reversal formation on Friday, and we looked at the pin bar on the weekly in our equities forecast. We’ve seen that formation follow-thru as well, with prices tilting-lower at the open, not yet showing any signs of recovery.

FTSE 100 Weekly Chart: Gap-Lower, Bearish Follow-Thru After Last Week’s Bearish Pin Bar

FTSE 100 Weekly Chart

Chart prepared by James Stanley

EUR/USD to 10-Month Lows: Euro Fall Continues, EUR/USD Approaches 1.1500

As the saying goes – up the stairs and down the elevator, EUR/USD has continued to fall in a rather consistent fashion. There appears to be very few reasons to back a longer-term bullish thesis here as uncertainty is the name of the game: Not only do we not know what’s going to pan out in Italy or Spain, but even if we did know, it’s near-impossible to calculate the financial repercussions to the Euro-Zone. So, we’re in somewhat of an information vacuum at the moment, and that will continue until we get some element of clarity around Italy.

This means we have brutal uncertainty around the currency right now, and that’s something that market participants generally abhor. This has led to a rather one-sided move in the Euro, and EUR/USD just tested the November, 2017 low, giving us fresh ten-month lows in the pair.

EUR/USD Daily Chart: Bounce From Fresh Ten-Month Lows

eurusd daily chart

Chart prepared by James Stanley

On a shorter-term basis, we can see where this morning’s run towards 1.1500 has led into a bounce. At this point, the bounce appears to be corrective in nature, and this highlights the 1.1600 zone as potential lower-high resistance. This area had helped to provide support shortly after this week’s open but, to date, hasn’t yet shown much for resistance. Resistance showing in this area would open the door for stops to be placed above the swing-high around 1.1640, looking for a move back-down to 1.1500 or lower.

EUR/USD Hourly Chart: Bounce Exposes Resistance Potential 1.1605-1.1640

eurusd hourly chart

Chart prepared by James Stanley

US Dollar Tests 95.00 on DXY After Support at Prior Resistance

The bullish move in the US Dollar has continued up to fresh highs, with DXY pulling back after a failed test of the 95.00 level. This comes after another iteration of higher-highs and higher-lows, with this point of support printing at that prior area of resistance. This keeps the door open for bullish continuation in the Greenback, with focus on the area around 94.50 for the next potential iteration of higher-low support.

US Dollar via ‘DXY’ Hourly Chart: Pullback from 95.00, Bullish Structure Remains

us dollar hourly chart

Chart prepared by James Stanley

Yen Strength Begins to Show as Global Risk Aversion Picks Up

The risk aversion drive is not relegated to just Europe, and the Japanese Yen is reflecting that as the currency moved up to a fresh May high against the US Dollar. This has produced a very visible move in EUR/JPY, with the pair making a fast approach at the 125.00 level after having been above 130.00 just one week ago. This could help to illustrate how EUR/JPY could be a more attractive option for plays of risk aversion, particularly given that the move of USD strength is a bit more built-in than what we have in the Japanese Yen.

EUR/JPY Daily Chart: Bounce from 125.00 Area as Sellers Remain in-Control

eurjpy daily chart

Chart prepared by James Stanley

In USD/JPY, the pair is coming off of fresh May lows as risk aversion has helped to stoke Yen-strength. USD/JPY is hanging on to the support zone we looked at last week by a thread, having posed a meager bounce after testing the bottom portion of the zone. This exposes a series of deeper support levels, towards 107.75 and the zone we previously followed when the pair was on the way up that runs from 106.35.106.61.

USD/JPY Eight-Hour Chart: Bounce From May Low

usdjpy eight hour chart

Chart prepared by James Stanley

GBP/JPY Potential

Circling around some of the above themes, GBP/JPY could be of interest to those looking to trade continued risk aversion. We looked at a bearish setup in the pair last week, and prices have now taken out both of our targets. The pair is currently seeing a bounce from around the 14.4% extension of the February sell-off; and this keeps interest around that 145.00 level for bearish continuation scenarios. The pair is currently in the midst of a vigorous bounce after an aggressive bearish move this morning; so chasing here could be dangerous. But should prices firm back-up to the 145.00 level that was the prior two-month low, short-side continuation can become attractive again.

GBP/JPY Eight-Hour Chart: Bounce from 14.4% Extension Highlights 145.00 Resistance Potential

gbpjpy eight hour chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX