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IMF Offers Additional Support for Euro Following Upbeat Aid Comments

IMF Offers Additional Support for Euro Following Upbeat Aid Comments

2012-01-18 11:59:00
Joel Kruger, Technical Strategist
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  • Euro finds support from solid data and upbeat IMF comments
  • Greek PSI talks and upcoming auctions will keep bulls honest
  • World Bank issues strong warnings and downgrades global growth
  • USD/JPY, EUR/JPY, EUR/CHF and EUR/AUD all worth watching
  • UK unemployment rises to 16-year high

Tuesday’s recovery in the Euro was impressive, with the single currency able to shake off much of the negative sentiment towards it and muster a rally back towards 1.2800. Still, at this point, last Friday’s high is key and a break above 1.2880 will be required to officially alleviate downside pressures and open a more significant short-term correction. The Euro was able to fight off some aggressive offers in early European trade after Fitch announced that a two notch downgrade to Italy was possible, with headlines that the IMF may boost its resources for lending by $1Trillion more than offsetting the bearish price action.

This helped to prop the Euro back to fresh daily highs, with better than expected auction results out of Germany and Portugal adding to the positive risk tone. However, as mentioned above, the 1.2880 level is key, and so long as nerves remain uneasy over shaky Greek talks and Thursday’s auction results, the market could just as easily reverse course and come back under pressure as it has been over the past several weeks. Additionally, the World Bank has been out with warnings of a crisis reminiscent to Lehman, but at this point, investors seem to be paying little attention to the bank’s pessimism and downgrade of global growth forecasts. Elsewhere, the Pound was a relative underperformer after the jobless rate rose to its highest level in 17 years.

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

  1. NZD +0.77%
  2. EUR +0.67%
  3. CHF +0.61%
  4. AUD +0.31%
  5. CAD +030%
  6. GBP +0.21%
  7. JPY +0.05%

On the strategy front, it is worth keeping an eye on USD/JPY today, with the major at risk for a break below some key support at 76.55. A daily close below this level will shift the focus back to the downside and expose a retest of the record lows by 75.55 from late October. EUR/CHF is another one worth watching, with the cross trading back in the 1.2000’s and dangerously close to the SNB 1.2000 floor. The shakeup at the SNB over the past several days has made things more interesting, but we would expect to see some aggressive bids emerge on any additional moves lower towards 1.2000. EUR/JPY is another cross rate worth a look with this market desperately trying to break out from oversold levels and from multi-year lows below 100.00. But the market will need to get back above 98.80 to confirm short-term reversal. Finally, EUR/AUD has been unable to generate any buy interest despite its violently oversold daily studies and multi-year/record low levels. This cross will need to break back above 1.2450 at this point to open the door for a needed short-term correction.

ECONOMIC CALENDAR

IMF_Offers_Additional_Support_for_Euro_Following_Upbeat_Aid_Comments_body_Picture_5.png, IMF Offers Additional Support for Euro Following Upbeat Aid Comments

TECHNICAL OUTLOOK

IMF_Offers_Additional_Support_for_Euro_Following_Upbeat_Aid_Comments_body_eur.png, IMF Offers Additional Support for Euro Following Upbeat Aid Comments

EUR/USD: Last Friday’s aggressive bearish reversal has negated the potential for a double bottom formation in the market and now opens the door for a fresh drop over the coming sessions back towards key psychological barriers at 1.2500. Still, daily studies are looking stretched to us and any additional weakness below 1.2500 is seen limited over the short-term in favor of a decent corrective rally. Back above 1.2880 required to officially alleviate immediate downside pressures.

IMF_Offers_Additional_Support_for_Euro_Following_Upbeat_Aid_Comments_body_jpy2.png, IMF Offers Additional Support for Euro Following Upbeat Aid Comments

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

IMF_Offers_Additional_Support_for_Euro_Following_Upbeat_Aid_Comments_body_gbp2.png, IMF Offers Additional Support for Euro Following Upbeat Aid Comments

GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

IMF_Offers_Additional_Support_for_Euro_Following_Upbeat_Aid_Comments_body_swiss1.png, IMF Offers Additional Support for Euro Following Upbeat Aid Comments

USD/CHF: This market remains very well supported on any form of a dip and looks poised for a fresh upside extension towards 1.0000 over the coming weeks. Look for a daily close back above 0.9600 to confirm and accelerate. Ultimately, any dips should be used as formidable buy opportunities, while only back below 0.9000 would ultimately threaten the recovery outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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

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