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Euro Rally Picks Up Steam as Key 100-Day SMA Approaches

Euro Rally Picks Up Steam as Key 100-Day SMA Approaches

2010-07-15 11:04:00
Joel Kruger, Technical Strategist


 The 100-Day SMA by 1.2920 now beckons and despite any form of stretched technical studies, we would not at all be surprised to see these unrelenting gains persist with a test of this level over the coming sessions. 
Relative Performance Versus USD on Thursday (As of 10:45GMT) – 

1) EURO +0.66% 
2) STERLING +0.56%
3) SWISSIE +0.51% 
4) YEN         +0.32%
5) CAD +0.16%
6) KIWI -0.23%
7) AUSSIE -0.31%
Interestingly enough, the demand for the Euro has not translated into a strongly correlated demand for some of the higher yielding currencies, with Aussie and Kiwi grossly lagging on the day. The Euro has been a prime beneficiary of the rebound in global equities, but is also now finding relative strength in the face of risk aversion and renewed concerns over the outlook for the US economy. The Fed has come out with anything but a reassuring outlook for the economy this week, evoking a higher degree of uncertainty than market participants would have liked to have expected. This uncertainty has resulted in a Greenback that has fallen even further out of favor, with no catalyst in sight to reverse the current trend. To add further fuel to the fire, Goldman Sachs has come out today to reverse its USD outlook, with the renowned investment shop taking on a more bearish view on the USD. JP Morgan earnings have now been released and the much stronger than expected result has helped to bolster financials in pre-market trade. 
In our opinion, the Euro gains are unsustainable and we strongly contend that the current global instability should put more pressure on the Eurozone economy than on the US economy. We believe that any concerns over the outlook for recovery in the US pale in comparison to those in the Eurozone, and as such see the USD in a better position to benefit going forward. The current rebound is therefore no more than an obvious corrective bounce within an underlying downtrend that could be poised for resumption very soon. As such, we would strongly recommend looking to sell into any additional rallies towards the 100-Day SMA over the coming sessions. 
Looking ahead, US PPI, initial jobless claims, and empire manufacturing are all due at 12:30GMT, along with Canada new motor vehicle sales and manufacturing shipments. US industrial production and capacity utilization are then out at 13:15GMT, followed by the Philadelphia Fed which caps things off at 14:00GMT. US equity futures point to a flat open, while commodities are bid, with both oil and gold tracking higher by some 0.50% and 0.70% respectively. 

EUR/USD:  Tuesday’s break back above 1.2725 and subsequent close above 1.2700 should be concerning for bears, with the market negating a bearish outside day formation from the previous week and also breaching downtrend resistance off of the early December 2009 highs. While we continue to retain a bearish outlook for the major, the latest price action leaves us sidelined. For now, we will need to see a break and close back below 1.2680 to get us thinking about establishing any fresh short positions. Until then, the focus remains on a test of the 100-Day SMA by 1.2920 over the coming sessions. 
USD/JPY: The market looks to have carved out a meaningful base by 87.00 and a fresh higher low is now sought out somewhere above 87.00 to be confirmed on the next upside extension beyond 89.15. Our overall outlook is highly constructive and we see the greater risk for a major acceleration back above 90.00 and towards 95.00 over the coming weeks. Ultimately, only a close back below 87.00 would delay.  
GBP/USD: (See Below) 
USD/CHF: Could finally be poised for some significant upside after the market stalled out by key multi-week support in the 1.0500 area and bounced to end a sequence of 11 consecutive daily lower highs. Daily studies have turned up but still track in oversold territory to suggest that there is plenty of room for a major bounce. We are however somewhat concerned with the bearish reversal day on Tuesday, but will retain our constructive outlook so long as the market holds above 1.0500 on a close basis. 
GBP/USD: The moves in the currency markets today are being led by some relative strength in the Euro which we feel is nearing overdone as the market fast approaches the 100-Day SMA. Many currencies have been rallying on the Euro’s coattails and with the move seen coming to an end in the very near future, we will look to take advantage by selling the Pound which would be at risk of coming off harder in the event of a Euro pullback. There is some very solid resistance just over 1.5500, and we like the idea of using the daily average true range of 160 points as a means to isolate our short entry levels in anticipation of a resumption of broad based USD buying. STRATEGY: SELL @1.5395 FOR AN OPEN OBJECTIVE; STOP 1.5535. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY. 
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com 
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