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Euro Expected to Remain Rangebound in Holiday Trade

Euro Expected to Remain Rangebound in Holiday Trade

2010-05-31 06:04:00
Joel Kruger, Technical Strategist



A closed US market for Memorial Day, and a UK Spring Bank holiday, are expected to keep market relatively light on Monday, the final day of the month for May. However, this does not mean that we can’t expect to see some volatility, with plenty going on in the markets to warrant some aggressive moves in either direction. For now, despite the latest recovery in the Euro, which opens the door to a potential short-term upside reversal for most major currencies against the buck, the single currency still remains well offered on rallies and still faces some tremendous challenges.

Relative Performance Versus USD on Monday (As of 5:00GMT) –

1) KIWI                           +0.50%
2) CAD                           +0.43%
3) SWISSIE                   +0.29%
4) EURO                        +0.28%
5) AUSSIE                     +0.13%
6) STERLING                +0.09%

7) YEN                            -0.39%

China’s SAFE has attempted to infuse some appetite for the beleaguered currency after saying that the Eurozone is “one of the most important investment markets.” However, Fitch’s downgrade of Spain on Friday and a report from a London-based consultant that the only way out for Greece is to exit the single currency, default on its debt, and restructure, have easily offset the China comments. On the official circuit, we have been hearing from various Fed officials over the past several hours. Fed Plosser comments have not proved to be too enlightening after the central banker attributes the recent USD surge to a flight to safety. Plosser goes on to say that although the Eurozone crisis has raised some concerns with regard to the US recovery, he does not see it as having any real impact on monetary policy decisions. Fed Evans has also been out with similar rhetoric, while adding that the current monetary policy is appropriate.

Finally, a Fed Chair Bernanke has been on the wires following his video taped remarks at a Bank of Korea conference on emerging markets. Bernanke says that it is important for developing economies to maintain strong domestic growth as well as economic and financial stability. ECB President Trichet is the only non-US central banker of note on the wires, with Trichet also appearing in a video taped recording in front of the Bank of Korea emerging market conference. Trichet says that emerging countries have remained a source of strength for the global economy, with the recent crisis even adding to the recognition, potential and importance of these economies.

On the data front, Japanese manufacturing activity was higher in April, while industrial production came in weaker than expected, and wage earningsbput in their biggest gain since December 2005. In the UK, house prices rose by the same M/M margin as the previous print, and improved Y/Y. Meanwhile in Australia, TS Securities inflation nudged up from the previous month, while new home sales also improved. Private sector credit was softer, and the current account was wider than forecast. Company profits managed to come in on the stronger side of estimates, and new home sales recovered into positive territory in April. In New Zealand, business confidence slipped back from its April readings.

Looking ahead, Eurozone M3 (-0.2% expected) is due at 8:00GMT, followed by the Eurozone business climate (0.20 expected), industrial confidence (-7 expected), consumer confidence (-18 expected), and economic confidence (100.6 expected), and service confidence (6 expected) readings, all due at 9:00GMT. Also out at 9:00GMT is the Eurozone CPI estimate (1.7% expected). In North America, the calendar is entirely focused on Canada, with industrial product prices (-0.3% expected), GDP (0.5% expected), and raw materials prices (1.0% expected) all due at 12:30GMT. US equity futures are tracking higher, although they are less relevant in light of the closed markets, while oil is also higher, and gold slightly lower. We do not recommend that traders look to take any positions on Monday, and instead would advise waiting until a fuller Tuesday session.


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 last Thursday does open 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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