Friday's US Economic Data Could Put More Pressure on Fed
- Markets locked in consolidation ahead of US economic data
- US CPI, industrial production and Michigan confidence due
- Strong showing could ultimately weigh on US equities
- EURCHF back below 1.2100 following SNB decision
Currencies have been mostly consolidating over the past 24 hours with the Euro finding bids ahead of 1.3000 and USDJPY stalling above 84.00. The Euro has also bounced ahead of some key support at 1.2975, and a break below will be required to open the door for an acceleration of declines and bearish resumption towards the 2012 lows from early January at 1.2620. The economic calendar in North America will be rather important today, particularly in light of the latest Fed decision, with any signs of continued recovery in the US economy to further strengthen the case for a reversal of monetary policy sooner than 2014. Fed Lacker, the lone dissenter at the previous meeting, has already expressed his hawkish view that economic data is starting to show signs of recovery and rates should start to go up in 2013.
Relative performance versus the USD Friday (as of 10:15GMT)
Key releases on Friday include US inflation, industrial production and Michigan confidence. This is a nice balance and representation of US data and we would expect to see the US Dollar well bid on an impressive showing. But stronger economic data will not necessarily translate into higher US equities, with risk traders likely to grow more concerned with the prospects for a Fed reversal. Moving on, price action in EURCHF should not be ignored, with the market finally breaking out of a very tight single digit multi-day range this week to clear 1.2100 before reversing yet again back below 1.2100. In their latest policy decision, the SNB reaffirmed their strong commitment to aggressively defend the 1.2000 floor and while the market has been unable to really test the SNB’s resolve to this point, market players are also not looking to push into large EURCHF long positions. Still, it is very hard to argue against buying a cross rate that a central bank has committed to supporting, that offers a positive yield differential and trades by historically low levels. For now, we remain sidelined, but we will be on the lookout for an opportunity to establish a meaningful long position over the coming sessions.
EUR/USD: Last Friday’s aggressive pullback strengthens the prospects for the end of a corrective move in 2012 which has in fact stalled just ahead of 1.3500. From here, the risks are tilted to the downside and a break below next key support by 1.2975 will be required to officially put the pressure on the downside and open an acceleration of declines back towards the 2012 lows at 1.2620. At this point, only a break back above 1.3300 would alleviate downside pressures and delay outlook.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after closing above the weekly Ichimoku cloud for the fist time since July 2007. 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 weeks. 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 84.00 over the coming sessions could prove hard to come by with shorter-term 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 84.00 for the time being and instead recommend looking for opportunities to buy on dips towards 80.00-82.00.
GBP/USD: The market has been costly confined to trade between the 100 and 200-Day SMAs since early February and the latest break back below the 100-Day SMA therefore suggests that we could be on the verge of a bearish break. The key level to watch comes in by 1.5600, and a break and close below this level will reaffirm bearish outlook and open the door for a more significant bearish decline towards the 1.5000-1.5300 area further down. Inability to establish below 1.5600 however, will suggest that more choppy directionless trade is in the cards.
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. The latest break back above 0.9300 helps to confirm bullish outlook and should now accelerate gains. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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