Risk Appetite Seen Well Supported into End of Week
- Expectations continue to hinge on productive EU Summit
- Investors positioning ahead of ECB and BOE event risk
- Aussie outperforms on stronger than expected GDP data
- Italian and UK industrial production disappoint; German data is better
Risk correlated markets remain very well supported and it seems as though investors are growing increasingly confident that the EU Summit this Friday will produce some groundbreaking results. While we remain highly skeptical with this line of thinking, there is no point in fighting the price action which suggests additional currency and equity upside in the month of December. Our core view is however grossly US Dollar bullish and we will be waiting for opportunities to look to build back into the Dollar on a larger dip this month. Ultimately, any resolution that EU leaders provide, while necessary, will still reflect the dire situation and further solidify the bleak growth outlook for Europe going forward.
Relative performance versus the USD on Wednesday (as of 11:20GMT)
In the interim, market participants are focused on some central bank event risk ahead of Friday, with both the Bank of England and European Central Bank policy decisions due Thursday. While no change is expected from the Bank of England, we still look for a dovish line from the central bank given the ongoing global crisis and softer local economic data. The European Central Bank is on the other hand expected to make a move, and will likely cut rates for the second consecutive time by 25 basis points. We will also be on the lookout for any additional alternative forms of accommodative monetary policy measures taken by the ECB on Thursday, ahead of Friday’s critical Summit.
On the data front, Swiss unemployment came in as expected, Italian industrial production was much weaker, UK industrial and manufacturing production were well below consensus, while German industrial production was better. Although currencies have barely nudged in quiet Wednesday trade, the Australian Dollar is the strongest performing major currency on the day with the currency finding some relative bids on the much better than expected overnight GDP data. US equity futures are decently bid, while oil is mildly higher and gold trades slightly offered.
EUR/USD: Remains locked in some consolidation following the bounce out from 1.3200. The key levels to watch above and below come in at 1.3550 and 1.3330 respectively and a daily close above or below will be required for a clearer short-term directional bias. A break and close back above 1.3550 will suggest that the market is still in the process of correcting and could head back into the 1.3800 area, while a close back below 1.3330 will open the door for a bearish resumption and retest of the key October lows at 1.3145.
USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.
GBP/USD: The market correction out from the recent lows at 1.5420 appears to have finally stalled out and we will be looking for a daily close back under 1.5560 to confirm bias and accelerate declines. A close below 1.5560 should accelerate declines towards 1.5420, below which will open an even deeper setback to retest critical support by the October lows at 1.5270. Ultimately, only back above 1.5800 would delay and give reason for concern.
USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.
--- Written by Joel Kruger, Technical Currency Strategist
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