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Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

2011-12-13 11:04:00
Joel Kruger, Technical Strategist
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  • UK inflation contained and comes in largely as expected
  • German ZEW mixed; current situation much weaker
  • Spanish and Greek auctions well received
  • ECB stands firm in opposition to aggressive action
  • Rating agencies dampen overall sentiment
  • Euro contemplates establishment below October low
  • FOMC rate decision key event risk for day

Markets remain pressured from the fallout of the EU Summit where European leaders failed to provide an acceptable resolution to the current crisis. Any hopes for a swifter course of action were seriously disappointed and then aggravated after the European Central Bank ruled out the possibility of aggressive action and BUBA reiterated that such central bank action would be illegal. The rating agencies added to the risk off mode, with market participants already worried over a potential downgrade to European countries following the S&P report last week, and Moody’s and Fitch contributing their own downbeat comments.

Relative performance versus the USD on Tuesday (as of 10:45GMT)

  1. AUD +0.32%
  2. JPY +0.15%
  3. CHF +0.12%
  4. NZD +0.08%
  5. EUR +0.04%
  6. CAD -0.02%
  7. GBP -0.04%

The Euro and risk correlated assets have since come under increased pressure and all eyes are now fixated on the EUR/USD 1.3145 October lows. A daily close below this level will open the door for the next wave of medium-term currency depreciation, with the Euro seen gravitating back towards the 1.2000 area while all other currencies should also see an acceleration in declines. The Euro declines appear to be lading the way, and a closer look at EUR/GBP shows the market breaking down below 0.8500 in recent trade and considering a move towards 0.8300. The UK’s ability to separate itself from the Eurozone mess has been helping to inspire the relative outperformance in the Pound.

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_audichi.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

Data in European trade produced some in line to slightly softer inflation data out of the UK, which was a welcome development for the Bank of England. Meanwhile, German ZEW was mixed with economic sentiment showing improvement from previous, and the current situation coming in much softer and grossly disappointing. Still, the Euro managed to hold above 1.3145 perhaps on some well received auction results out of Spain and Greece.

Looking ahead, US retail sales and business inventories will get a good amount of attention, but the key event risk doesn’t come until 19:15GMT when the Fed decides on rates. While no change is expected to policy just yet, we would be on the lookout for some more upbeat comments relating to the improvement in data on the local front. This could welcome additional USD bids as traders start to price in a narrowing in yield differentials back in favor of the US Dollar.

ECONOMIC CALENDAR

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_Picture_6.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

TECHNICAL OUTLOOK

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_eur.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

EUR/USD: The latest corrective rally appears to have stalled out by 1.3550 and the market looks poised for a bearish resumption to challenge the critical October lows at 1.3145. A daily close below 1.3145 is significant and will open the door for deeper setbacks over the coming weeks and months into the lower 1.2000 region. Ultimately, only a daily close back above 1.3550 will negate outlook and give reason for pause.

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_jpy2.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

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.

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_gbp2.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

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.

Euro_At_Risk_for_Fresh_Medium-Term_Drop_Into_the_1.2000s_body_swiss1.png, Euro At Risk for Fresh Medium-Term Drop Into the 1.2000's

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. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9500. Ultimately, only back under 0.9065 would delay constructive outlook.

--- 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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