Investors Pause Mid-Week to Prepare for Event Risk Ahead
- Markets consolidate latest declines
- Aussie GDP weaker than expected
- Zerohedge piece gets attention
- German economic data rather soft
- Key central bank event risk and US NFPs still to come
Price action on Wednesday has been mostly consolidative thus far, with currencies content on pausing for a breather following some intense selling on Tuesday. More concerns over the state of the global economy have emerged and seem to have shaken the confidence of many traders. Global equities have also finally begun to roll over, after a very solid performance thus far in 2012. The softer than expected Aussie GDP data overnight and earlier downgraded forecasts on China only help to reaffirm the more subdued outlook for the global economy, and we would expect to see more risk off trade over the coming sessions. The Greek PSI talks will also be on radar screens, and this could be a market mover in wither direction pending the outcome.
Relative performance versus the USD Wednesday (as of 12:25GMT)
The big talk in a fairly quiet European session was about a Zerohedge piece which said that European banks were going to face huge margin calls as ECB collateral crumbles. Nevertheless, the market failed to react in any big way, with some much softer German manufacturing data also failing to influence price action. Meanwhile, we still have some major event risk ahead this week with the RBNZ, BOE and ECB all due Wednesday and Thursday, followed by the all important US NFP report on Friday. One other key development worth paying attention to has been the close in US equities below the 20-Day SMA for the first time in 2012 which could be warning of a more significant top.
EUR/USD: The latest failure ahead of 1.3500 and subsequent break back below 1.3350 could now warn that a lower top is finally in place ahead of the next major downside extension below the 2012 lows by 1.2620. However, there is some short-term rising trend-line support off of the 2012 lows by 1.3150 which will need to be convincingly broken before we can really get behind the idea of a full on downside acceleration. Inability to establish below 1.3150 will keep bull sin the picture and could still warn of additional corrective gains in 2012. Back above 1.3320 will also compromise bearish outlook.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond the recent highs at 81.85 over the coming sessions could prove hard to come by with technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 81.70 for the time being and instead recommend looking for opportunities to buy on dips into the 78.00-80.00 area.
GBP/USD: Inability to establish above the 200-day SMA once again keeps the multi-day range intact, and from here we would look for a bearish resumption back down towards the 1.5650 area over the coming sessions. Look for a sustained break below 1.5800 to confirm outlook, while only a daily close back above 1.5950 gives reason for concern.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. Look for additional gains over the coming sessions back towards 0.9300, with a break above to confirm and accelerate. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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