Euro Slips as German Leadership Bloc Opposes ECB Bond Buying Measures
On Thursday, European Central Bank President Mario Draghi hinted at an informal investment conference that the European Central Bank would do everything it could to preserve the Euro, and that it would be possible to buy sovereign debt to provide stability. While global financial markets rallied, we have questioned the strength of this move given the one thing that may prevent the European Central Bank from such a program from being implemented: German opposition. On Saturday, German Finance Minister Wolfgang Schaueble called the rumors of a bond buying program “speculation,” and today President Draghi is meeting with Jens Weidmann, head of the Bundesbank (Germany’s central bank) to discuss the measures. Mr. Weidmann has previously said that Article 123 of the Treaty on the Function of the European Union imposed a legal "prohibition on monetary financing", implying that the ECB cannot attempt to shore up the debt markets of Italy and Spain for covert fiscal support.
While there’s been weakness in the Euro today, peripheral European sovereign yields have continued to improve. The Italian 2-year note yield has fallen to 3.656% (-5.9-bps) while the Spanish 2-year note yield has dropped to 4.841% (-20.3-bps). Accordingly, the Italian 10-year note yield has risen to 5.670% (+5.3-bps) while the Spanish 10-year note yield has sunk to 6.494% (-16.3-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:58 GMT
The docket is barren on Monday with no significant events coming across the wires from either of the major North American economies nor are there any late day releases out of Europe. Accordingly, we will monitor the newswires for chatter from policymakers ahead of perhaps the two biggest central bank meetings of the year this week, when the Federal Reserve and the European Central Bank meet on Wednesday and Thursday, respectively.
EURUSD: While the EURUSD traded up towards 1.2400 on Friday little was made of the move as the pair hit 50 on the daily RSI and has since reversed. Today’s price action has thus far yielded an Inside Day, and it appears that there could be an Evening Star candlestick cluster of sorts in the works (we would expect a bigger sell-off today to suggest a true reversal pattern). Resistance comes in at 1.2310/30 and 1.2375/90 (July high). Support comes in at 1.2220/45, 1.2155/70, and 1.2110/20. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875.
USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. Watch the 5-DMA (78.35) for advances; the USDJPY hasn’t closed above the 5-DMA since July 11.
GBPUSD: While an Inside Day is forming today after the rally from the past two days, we note that the GBPUSD has broken weekly and daily highs and we would thus expect more gains through the end of the month (just Monday and Tuesday). Considering that the pair failed to retain gains, we expect topside resistance at 1.5735/45 (former July high, 200-DMA). Above, resistance is close at 1.5775/80 (100-DMA) then 1.5790/1.5805 (channel resistance, Bollinger Band). As noted last week, “Failure to break these levels should lead to a sharp pullback towards major support confluence in the 1.5575/1.5605 zone (former channel resistance, 10-DMA, 20-DMA, 50-DMA).” A daily close below this zone exposes the weekly lows from last week at 1.5455/60.
AUDUSD: The move to 1.0490/1.0505 as indicated late last week was completed today, though with the channel trendline slightly higher, there is scope for gains into 1.0510/15 now. Still, with the 4-hour RSI hitting overbought levels as the pair hits crucial resistance, there is scope for a pullback. We now look lower towards 1.0480 then 1.0440/45. Considering the price action in the EURUSD today, we expect that the US Dollar stands to gain, so rallies into 1.0490/1.0505 should be sold. Near-term support comes in at 1.0380/85, 1.0310/30, 1.0245/65, 1.0210/15, then 1.0170/90.
--- Written by Christopher Vecchio, Currency Analyst
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