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Euro Reaches Critical Short-Term Inflection Point; Stand Aside

Euro Reaches Critical Short-Term Inflection Point; Stand Aside

2011-10-11 11:54:00
Joel Kruger, Technical Strategist
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  • Price action very choppy in overnight trade, but market confined to ranges
  • Feels like we have reached a key inflection point
  • Keeping an eye on the Euro for clearer directional bias
  • Slovakia and Trichet weigh on sentiment somewhat
  • Fed set to release Minutes later today

Overall price action on Tuesday has been rather choppy, and although markets have remained confined to recent ranges, there is a growing sense that we could be on the verge of a breakout in either direction. At this point it is unclear which way we are headed but it feels as though we have reached some form of an inflection point. The euro’s rally on Monday was quite impressive, with the market breaking back above some key short-term resistance at 1.3690 before stalling out and consolidating. We contend that this will be the key market to watch over the coming sessions, with a break back above 1.3700 to signal a more significant rally and favorable reaction in risk correlated assets.

Relative performance versus the USD on Tuesday (as of 11:40GMT)

  1. JPY +0.07%
  2. GBP -0.22%
  3. EUR -0.30%
  4. CAD -0.34%
  5. AUD -0.41%
  6. NZD -0.52%
  7. CHF -0.69%

However, inability to establish above 1.3700 will keep the broader negative sentiment in play and likely open the door for a fresh wave of risk liquidation. Clearly, the prospects for a solution to the eurozone crisis are looking up following the Merkel and Sarkozy announcement on Monday, but at this point it is only a plan and there is a good deal of work that needs to get done before real results are seen. Slovakia’s resistance to the EFSF on Tuesday has not helped matters, while ECB President Trichet was on the wires with some downbeat comments. The fact that Trichet had said that the central bank had been warning governments of the threat to the economy is discouraging and only highlights the ongoing disconnect between the downturn in the economy and the ability for officials to respond accordingly.

Elsewhere, UK data highlighted the European session and produced an on the whole softer than expected industrial production reading (after revisions). Looking ahead, the Fed will release the Minutes from the previous meeting and this will likely influence price action into the North American afternoon. Otherwise, broader global macro themes and developments will continue to be of central importance. US equity futures and commodities prices are weighed down into the final session of the day.

ECONOMIC CALENDAR

Morning_Slices_body_Picture_5.png, Euro Reaches Critical Short-Term Inflection Point; Stand Aside

TECHNICAL OUTLOOK

Morning_Slices_body_eur.png, Euro Reaches Critical Short-Term Inflection Point; Stand Aside

EUR/USD: Setbacks have stalled out for now by 1.3145 with the market in search of a fresh lower ahead of the next major downside extension below 1.3000. Overall, our outlook remains quite bearish and we continue to project deeper setbacks into the lower 1.2000’s over the coming weeks. Ultimately, only a daily close back above 1.3690 would delay outlook and give reason for pause.

Morning_Slices_body_jpy2.png, Euro Reaches Critical Short-Term Inflection Point; Stand Aside

USD/JPY:Has been locked in an intense consolidation in the 76.00’s over the past several weeks, since breaking to fresh record lows by 75.95, and while we would not rule out the possibility for a continuation of the downtrend, any additional declines are seen as limited. Longer-term technical studies are looking stretched and we anticipate the formation of a major base in favor of an intense upside reversal. Look for a break back above the August highs at 80.25 to confirm outlook and accelerate. In the interim, any dips towards 75.00 are viewed as an excellent and compelling buy opportunity.

Morning_Slices_body_gbp2.png, Euro Reaches Critical Short-Term Inflection Point; Stand Aside

GBP/USD: Although the overall structure remains bearish, setbacks have been very well supported around the 1.5300 area and the market is currently in the process of consolidating the recent declines. We would however warn of the potential formation of a double bottom on the daily chart, with a break and daily close back above the neckline at 1.5715 to confirm the formation and expose a more significant rally back above 1.6000. However, inability to establish above 1.5715 will keep the bearish structure intact and open the door for a bearish resumption back towards and below the recent range lows at 1.5270.

Morning_Slices_body_swiss1.png, Euro Reaches Critical Short-Term Inflection Point; Stand Aside

USD/CHF: Although daily studies are showing overbought and warn of the potential for a short-term corrective pullback, the recent daily close back above the 200-Day SMA is significant and now opens the door for the next upside extension towards 0.9500 further up. Medium-term and longer-term studies still show plenty of room for upside ahead, while the short-term outlook also remains constructive above 0.8645. Ultimately, only back under 0.8645 delays short-term outlook and would open the door for a more sizeable corrective decline. Still, even at that point, buying into dips would be the preferred strategy.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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