Choppy Price Action Expected into Thin Holiday Trade
We have finally seen a decent reversal in the markets on Thursday, with currencies, equities and commodities all rebounding on the resurgence in risk appetite. The Euro has put in an impressive bullish outside day against the buck, after stalling just shy of the 1.2145, 2010 lows, and we could now be seeing the formation of a double bottom, with a break above neckline resistance at 1.2670 required to officially trigger the pattern. However, all of these markets have been deeply oversold and a corrective bounce was already to be expected given the stretched price action.
Relative Performance Versus USD on Friday (As of 6:05GMT) –
There is still a large amount of fear and uncertainty surrounding the outlook for the global economy, and as such, we do not recommend looking to exit USD long positions, and would rather look to buy the Greenback on any dips against all of the other major currencies, including the Yen. Market participants should also be reminded of the Memorial Day long holiday weekend ahead of us, and that trading into late Friday and all of Monday will be much thinner, which could lead to added volatility and unpredictable trade.
For now, the Euro has come back under pressure in Asian trade, with the market already lower by some 100 points. Look to see some squaring up of positions into the month-end, and also look for more rumors, market chatter, official comments, and press reports to dominate the headlines. Our best recommendation over the next few sessions is to stand aside, and only look to get involved if absolutely necessary.
On the data front, a batch of Japanese data was released overnight, highlighted by a higher than expected unemployment rate. Other data out of Japan included softer CPI, weaker household spending, and stronger retail trade.
Looking ahead, German import prices (1.5% expected) are due at 6:00GMT, followed by Swiss exports and trade balance at 6:15GMT. The Swiss KOF (2.02 expected) caps things off for European trade at 9:30GMT. In North America, personal consumption (0.1% expected), personal spending (0.3% expected) and personal income (0.4% expected), are due out at 12:30GMT, along with Canada current account (-7.5B expected). Chicago PMI (61.0 expected) is then due out at 13:45GMT, with University of Michigan confidence (73.3 expected) ending the data for the week at 13:55GMT. US equity futures and commodities are tracking slightly lower on the day thus far.
EUR/USD: The overall trend remains intensely bearish and any rallies are still classed as corrective. Look for a lower top to now carve out below 1.3100, ideally by 1.2670, ahead of the next fresh downside extension back towards and eventually through 1.2145. Below 1.2145 exposes psychological barriers at 1.2000 further down. Ultimately, only back above 1.3100 would negate bearish outlook and give reason for pause. However, the latest break back above 1.2400 and bullish outside day formation on Thursday opens the door for a potential double bottom, with a neckline by 1.2670. If triggered, the double bottom would directly expose critical resistance by 1.3100 further up. As such, for now, we remain sidelined and will wait to see how things play out.
USD/JPY: The whipsaw price action from violent trade in early May has delayed our outlook but certainly does not change our overly constructive bias. The medium-term higher low from early March just over 88.00 remains intact, with the market stalling out ahead of the level, and we now look for a push higher from here back towards and through next key topside barriers by 95.00. Only a break back below 88.00 would negate and give reason for pause.
GBP/USD: The market has finally taken out the key 2010 lows by 1.4780 to confirm a fresh medium-term lower top by 1.5500 and open the next major downside extension towards critical psychological barriers by 1.4000 over the coming days. At this point however, with daily studies looking stretched, the market has entered a period of consolidation to allow for daily studies to unwind, and we would not rule out the possibility for a short-term corrective bounce back towards 1.4700-1.4900 before bearish trend resumption. It is worth noting that the 78.6% fib retracement off of the major 2009, 1.3500-1.7050 move, has been tested in the 1.4200’s, and this looks to have provided the necessary support to help trigger the current bounce.
USD/CHF: The overall outlook remains highly constructive and while daily studies do not rule out the possibility for some form a pullback to allow for technicals to unwind, any setbacks should be very well supported ahead of 1.1200, in favor of an eventual push towards 1.2000. In the interim, short-term support comes in by 1.1430 and a break and close below will be required to trigger the onset of a short-term corrective pullback.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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