Euro Price Action Confounds; Signs Still Risk Negative But Market Supported
- Euro very well supported above 1.3100
- All signs point to more risk off trade but no real follow through yet
- Swiss trade balance shows weakness in export sector
- UK public finances continue to highlight weakness in economy
- Spanish and Italian auctions solid while Dutch auction disappoints
- USD/JPY back under pressure and contemplating test of 80.00
- EUR/CHF still very interesting cross to watch despite lackluster price action
Despite a slew of worrying fundamentals which have been weighing on risk correlated assets, overall, these markets have been suspiciously well supported. A batch of weaker Eurozone PMIs, political troubles for Sarkozy in France, questions surrounding Dutch AAA rating status, and an ever weakening Spanish debt situation, all contribute to a very shaky Eurozone outlook that should in theory result in a more substantial risk off reaction than the one we have seen. Throw in continued signs of slowdown in China, some relative weakness in the emerging markets and the latest softer than expected Auatralian CPI, which seals the deal for a rate cut in May, and the ability for markets to remain supported becomes all the more confounding.
Relative performance versus the USD Tuesday (as of 11:30GMT)
However, we can not ignore price action, and with the Euro being the key market to watch, inability to break down below 1.3100 on Monday leaves us with a much more cautious outlook. We will wait for a sustained break above 1.3200 or back below 1.3000 for a clearer directional bias. Other key markets to watch on Tuesday include USD/JPY, with the pair recovering from sub-81.00 levels after some BOJ comments that the central bank would continue to implement monetary easing and EUR/CHF, which continues to trade in a very tight range, but could be at risk for a breakout given the SNB’s commitment to aggressively defend 1.2000, and most recent trade data which reaffirms the SNB commitment after exports took a big hit. Elsewhere, Italian and Spanish bond auction results were solid, while the auction was less impressive in Holland. Looking ahead, the Fed will meet on Wednesday and market participants could be content on more consolidation ahead of the event risk.
EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Last Friday’s bullish close opens the door for additional gains over the coming sessions, but ultimately, any rallies towards 1.3400 should be well capped. A break and daily close back under 1.3000 is now required to put pressure back on downside and accelerate declines to the early 2012 lows at 1.2660.
USD/JPY: The latest pullback from the 2012, 84.20 highs is viewed as corrective and it looks as though the market has finally found some solid support ahead of 80.00. The setbacks have stalled by the top of the daily and weekly Ichimoku clouds and we look for the formation of a fresh medium-term higher low somewhere around 80.00, ahead of the next major upside extension back towards and eventually through 84.20. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate. Any dips towards 80.00 should therefore be used as formidable buy opportunities.
GBP/USD: The recent break back above 1.6000 now opens the door for fresh upside towards the October 2011 peak at 1.6165. However, any additional gains beyond 1.6165 should prove hard to come by, and we once again see risks for a bearish reversal in favor of renewed weakness back down towards key support by 1.5800. A break and close below 1.5800 will then accelerate declines. Ultimately, only a weekly close above 1.6165 would negate underlying bearish bias.
USD/CHF: Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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