Currencies Remain Well Supported on Dips; Still Room for Upside
- Risk correlated assets remain well supported for now
- Euro still see higher towards 1.3000 before renewed selling
- Retail traders positioning is unusually balanced
- G20 draft communiqué offers some encouraging statements
- UK inflation data takes some pressure off BOE
- German ZEW much weaker than expected
While many risk traders have been discouraged with the lack of follow through following the impressive open to the week, the net result has not been all that discouraging with the market more or less consolidating recent gains since the close of the previous week. European bond yields at record levels and ongoing tensions in Greek politics as coalition attempts are made, have kept markets from getting overly bullish, but at the same time, risk correlated assets remain very well supported for now.
Technically, this continues to support our view that the Euro should see one more rally towards 1.3000 before eventually fizzling out. This rally should in turn open the door for additional gains in other currencies, while at the same time weighing more heavily on the Yen and US Dollar. Interestingly enough, retail traders are basically equally net long and short all of the major currency pairs, with only USD/JPY showing a clear ratio in favor of longs. But even here we have see a drastic reduction in long positions from 10:1 down towards 5:1.
Relative performance versus the USD Tuesday (as of 11:00GMT)
Also seen supporting risk markets has been a G20 draft communiqué which affirms a commitment to support the global economy by strengthening growth and restoring confidence. We have seen a number of comments in recent weeks which support this statement and the notion of a global coordinated action is very realistic. Elsewhere, UK inflation data came in softer than expected which weighed slightly on the Pound following the release but was certainly a welcome development for the Bank of England. Meanwhile German ZEW came in much worse than expected, but the release failed to really weigh on the Euro as broader macro demand kept the single currency supported, perhaps on an expectations of another round of government proponomics.
Earlier today, the RBA released a not as dovish Minutes, while concerning comments on the strength of the Yen from FinMin Azumi failed to influence price action. Looking ahead, market participants will start to focus on tomorrow’s highly anticipated Fed rate decision. There has been a lot of speculation around what the Fed might do and if any new measures will be takes to offer additional stimulus to the US and global financial markets.
EUR/USD:The market is in the process of correcting from some oversold levels after breaking to yearly lows just under 1.2300. While our overall outlook remains grossly bearish, from here we still see room for short-term upside before a fresh lower top is sought out. Look for the latest positive weekly close to open the door for acceleration into the 1.2800-1.3000 area, where fresh offers are likely to re-emerge. Setbacks should be well supported ahead of 1.2400.
USD/JPY:The latest setbacks have been rather intense, with the market collapsing through the 200-Day SMA before finally finding support by 77.65. We have since seen attempts at recovery and we contend that the market should continue to break higher, with sights ultimately set on a retest and break of the 2012 highs by 84.20 further up. However, at this point, we will need to see a break and close back above 80.00 to officially alleviate downside pressures and reaffirm bullish outlook.
GBP/USD: Daily studies are now correcting from oversold and from here risks seem tilted to the upside to allow for a necessary short-term corrective bounce after setbacks stalled just shy of the 2012 lows from January. Look for additional upside towards the 1.5800-1.6000 from where a more meaningful lower top is sought out ahead of bearish resumption.
USD/CHF: While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, shorter-term risks are for more of a corrective pullback to allow for the market to establish a fresh higher low. As such, we see risks for weakness over the coming sessions towards the 0.9200-0.9300 area before the market looks to reassert its bullish momentum and broader uptrend.
--- Written by Joel Kruger, Technical Currency Strategist
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