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Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

2012-07-31 10:56:00
Christopher Vecchio, CFA, Senior Strategist
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In thin trading thus far on Tuesday, the Australian Dollar has emerged as the top performer amid a quiet Asian and (thus far) European session. In terms of data, the Euro-zone Consumer Price Index Estimate yearly figure for July came in at expectations of +2.4%, sending a signal that the additional liquidity injected into the system over the past eight-months (over €1 trillion) may be cycling back into the real economy, but only in terms of price pressures. Perhaps a high expected rate of inflation contains the European Central Bank from acting too quickly, given German intolerance for high rates of inflation. Meanwhile, the Euro-zone Unemployment Rate remained at its highest level ever of 11.2% in June. We expect volatility to remain curbed for the coming day or so ahead of the Federal Reserve policy meeting on Wednesday and the European Central Bank policy meeting on Thursday, barring unforeseen event risk.

Despite the slight bullish undertone to the Euro today, it looks like peripheral European sovereign debt has peaked ahead of the European Central Bank’s policy meeting on Thursday. The Italian 2-year note yield has inched higher to 3.782% (+6.6-bps) while the Spanish 2-year note yield has ticked up to 4.741% (+0.5-bps). On the other hand, the Italian 10-year note yield has improved to 5.976% (-1.7-bps) while the Spanish 10-year note yield has been pared to 6.520% (-0.9-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:32 GMT

AUD: +0.22%

EUR:+0.21%

CHF: +0.16%

NZD:+0.06%

CAD:+0.04%

JPY: -0.08%

GBP: -0.10%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.06%(-1.47% past 5-days)

ECONOMIC CALENDAR

Aussie_Leads_as_Euro_US_Dollar_Consolidate_Ahead_of_Key_Policy_Meetings_body_Picture_5.png, Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

The docket is significantly saturated on Tuesday as there are a number of historically market moving events due out at 08:30 EDT / 12:30 GMT. To wit: CAD Gross Domestic Product for May, in which the Canadian economy is expected to have seen growth tick up to +2.6% from +2.0%, on a yearly-basis. Also released at the same time are the USD Personal Income and Personal Spending figures for June, both of which should show a modest improvement (but not enough to offset concerns of a slowing US economy). The USD Personal Consumption Expenditure Core (PCE Core) due at 08:30 GMT / 12:30 EDT should also attract some interest, considering the Federal Reserve uses the yearly PCE Core figure as a gauge of inflation. Finally, at 10:00 EDT / 14:00 GMT, the USD Consumer Confidence report for July is expected to show a slight deterioration in consumer sentiment.

TECHNICAL OUTLOOK

Aussie_Leads_as_Euro_US_Dollar_Consolidate_Ahead_of_Key_Policy_Meetings_body_Picture_1.png, Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

EURUSD: The EURUSD is working on an inside day thus far and price has been constrained by the 1.2300 level to the topside. As the pair continues to trade with an RSI below 50 on the daily charts, we believe selling rallies going forward is the preferred course of action. Accordingly, given the tight price action relative to yesterday’s close, near-term 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.

Aussie_Leads_as_Euro_US_Dollar_Consolidate_Ahead_of_Key_Policy_Meetings_body_Picture_3.png, Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

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.

Aussie_Leads_as_Euro_US_Dollar_Consolidate_Ahead_of_Key_Policy_Meetings_body_Picture_4.png, Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

GBPUSD: The pair continues to pullback after its massive two-day rally to close the week last week. However, it appears that a new channel has formed, and at present time, if the channel is to stick, a test of the range low near 1.5500 should be in order. Given the tight price action today relative to yesterday’s close, we expect topside resistance at 1.5735/45 (former July high, 200-DMA). Above, resistance is close at 1.5775/80 (100-DMA). 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, 20-DMA, 50-DMA).” A daily close below this zone exposes the weekly lows from last week at 1.5455/60.

Aussie_Leads_as_Euro_US_Dollar_Consolidate_Ahead_of_Key_Policy_Meetings_body_Picture_2.png, Aussie Leads as Euro, US Dollar Consolidate Ahead of Key Policy Meetings

AUDUSD: The AUDUSD has pushed its ascending channel trendline, moving as high as 1.0538 in trade today though is currently sitting slightly off its highs. 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 1.0535/40 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

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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