Volatility To Pick up Into Final Session of Week As US Data Digested
- Markets consolidate recent gains into final session for day
- Any additional currency strength over coming days should be sold
- S&P downgrade of Spain brushed aside but should not be discounted
- Eurozone inflation comes in higher than expected
- US data in the form of retail, sales Michigan confidence and business inventories due
We were off the desk on Thursday and not a lot has happened in that time, with the markets locked in some consolidation ahead of their next moves. While risk sentiment has certainly mounted a recovery over the past several days, we continue to warn that any additional gains in these risk correlated assets should prove fleeting in favor of a resumption of flight to safety trade. While Eurozone officials have been stepping up efforts to provide a more clear resolution to the current crisis, there is still a good deal of work that needs to get done before any results are seen, and this will likely take a very long time to play out. As such, the preferred strategy is to look to be selling the Euro into additional rallies towards 1.4000, while also taking advantage of the break back above parity in Aussie and looking to fade any additional strength towards 1.0500.
Relative performance versus the USD on Friday (as of 11:10GMT)
There have been very few developments over the past 24 hours but the most significant is not risk supportive and could start to weigh more heavily on sentiment into the weekend. S&P’s downgrade of Spain’s ratings to AA- from AA with a negative outlook, follows a similar ratings cut by Fitch in the previous week, and once again highlights the difficult path ahead for Eurozone recovery. Although citing some signs of resilience in the local economy in 2011, a combination of heightened risks to growth prospects, tighter fiscal conditions, elevated private sector debt, and a slowdown in the country’s trading partners, were all seen factoring into the downgrade. S&P went on to warn that Spain’s ratings could be lowered yet again if the economy continues to show signs of deterioration in 2012.
Moving on, there has been a lot of talk that the best option for Greece is to default, and suggestions that European investors should be required to take haircuts of between 50-60% has not helped to encourage the recent risk rally. Also in the headlines are comments from CBI director general Cridland who says that proposed EU financial regulation will likely have a negative impact on the UK prospects for recovery and growth. This follows some equally concerning Telegraph story from Thursday which talked of a potential UK downgrade. Markets have been fairly quiet into North America, but higher than expected Eurozone CPI has kept the Euro propped for now. Volatility should pick up into the US, with retail sales, Michigan confidence and business inventories are set for release.
EUR/USD: The break back above 1.3700 on Wednesday suggests that a more significant short-term base is in place by 1.3145 and from here we see risks for further consolidation before the broader downtrend resumes. Key short-term support now comes in by 1.3565 and a break back below will be required to alleviate immediate topside pressures. Rallies above 1.3900 should however be sold as the market looks to carve a fresh lower top on the daily chart.
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 77.90 to confirm outlook and accelerate. In the interim, any dips towards 75.00 are viewed as an excellent and compelling buy opportunity.
GBP/USD: The break back above 1.5715 on Wednesday triggers the formation of an inter-day double bottom on the daily chart which now opens a fresh upside extension towards a measured move objective at 1.6100. The 1.6100 area also loosely coincides with the 100/200-Day SMAs, but we would expect that any additional gains should be capped by these longer-term SMAs ahead of a resumption of the broader underlying downtrend. However, inability to extend gains followed by a break and close back below 1.5665 would suggest that the corrective rally has come to a premature end, and should accelerate declines.
USD/CHF: The market is in the process of consolidating its latest sharp recovery out from record lows by 0.7000. Although there are some risks over the short-term for deeper setbacks, any declines should be very well supported on a close basis above 0.8500. Back above 0.9315 will signal an end to the consolidative price action and confirm a fresh higher in place ahead of the next major upside extension back above parity. Ultimately, only a close back below 0.8500 would give reason for concern.
--- Written by Joel Kruger, Technical Currency Strategist
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