Softer German PMIs Open The Door For Additional Euro Declines
Euro declines have accelerated over the past few sessions, and the escalating negative sentiment towards the Eurozone has negatively influenced the rest of the currency market with sentiment shifting dramatically lower. A crushing defeat of the ruling Socialist party in Spain, and a rapid loss of support for the government in Greece have been key drivers of the latest price action, while serious concern over massive levels of debt of regional and municipal Eurozone governments has also played a major role.
Relative Performance Versus the USD Monday (as of 11:10GMT)
A report in Monday’s Der Spiegel highlights these risks after saying that "banks, above all from Greece, Ireland, Portugal and Spain, have provided as collateral, asset-backed securities that are unfit for central bank loans as their debt rating is low or non-existent". This has opened a fresh wave of selling in EUR/CHF which has broken to yet another record low below 1.2400 on flight to safety buying. Much softer German manufacturing and services PMIs have added more fuel to the fire and the Euro has since dropped below 1.4000.
Elsewhere, the Pound has been finding some relative strength, with some very hawkish comments from Bank of England’s Dale propping the UK currency. The central banker has said that locals should prepare for rate hikes over the next couple of years and that while he concedes that the monetary policy reversal will be difficult, he feels that the risks to longer-term inflation are more severe at this point and need to be addressed. Meanwhile, the antipodeans have been getting hit hard as the negative risk themes take hold, with the Australian Dollar coming under added pressure after China HSBC manufacturing PMIs came in at its lowest level in 10 months. Any signs of cooling in the China economy should weigh heavily on the correlated Australian Dollar going forward.
The outlook for the US Dollar is looking increasingly constructive, with all major and minor currencies showing relative weakness against the Greenback, and should the current negative risk sentiment environment remain, we would expect to see the buck find more safe-haven bids going forward. Looking ahead, the economic calendar in North America is all but empty, with the only notable release coming in the form of the Chicago Fed National Activity Index. US equity futures and oil prices are tracking a good deal lower while gold is marginally offered.
EUR/USD: The market continues to show signs of weakness following the break below 1.4155 support several days back, and the risks from here are for deeper setbacks over the coming days towards next key support in the 1.3800’s. Look for a clear break below 1.4045 to confirm and accelerate, while any rallies should be well capped ahead of 1.4350.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days.
GBP/USD: The market is starting to give way, with the price now dropping back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks below 1.6000, with any rallies now expected to be well capped ahead of 1.6400. Ultimately, only back above 1.6520 gives reason for concern.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close for two consecutive weeks and breaking back above the previous weekly high. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
A UK clearer has led sales in Cable, real money, models, funds have also been noted. Asian names and leveraged accounts have been keen sellers in Aud/Usd. Plenty of sellers in Eur/Usd with large fund and Asian accounts leading the way. Vague talk of SNB demand in Eur/Chf.
Written by Joel Kruger, Technical Currency Strategist
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