Majors Muddle Sideways Against US Dollar Amid Thinner Volumes
Trading was light in the overnight as volumes declined across Europe, suggesting that many market participants remain on the sidelines during the summer doldrums. Indeed, such soft trading conditions have led to volatility dropping to historic lows, which although has typically meant a relief in financial stresses on the horizon and thus a risk-friendly environment, little upside progress has been made by risk-sensitive currencies such as the Australian and New Zealand Dollars or by the Euro over the past several days.
As noted yesterday, “in part, the Euro’s advance today has been aided by modest improvements in peripheral European sovereign debt yields; each day that bond yields don’t spike higher should be considered bullish for the Euro, even if yields move sideways,” and the same holds true today. The Italian 2-year note yield has dipped to 3.384% (3.5-bps) while the Spanish 2-year note yield has inched higher to 4.108% (+3.9-bps). Similarly, the Italian 10-year note yield has fallen to 5.843% (-3.2-bps) while the Spanish 10-year note yield has fallen to 6.744% (-3.9-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:42 GMT
Taking a look at the docket today has been and continues to be saturated as markets turnover into the North American trading session. At 08:30 EDT / 12:30 GMT, the USD Advance Retail Sales report for July will be released. The US economy has seen data pick back up in recent weeks, and the July Advance Retail Sales report should follow this trend. Forecasts show that the consensus expectation is for modest growth of +0.3% growth last month, after sales dropped by -0.5% in June. Overall, sales have increased by +0.79% thus far in 20120, and if the actual meets expectations, sales will have risen by +1.10% this year. Considering the pent up expectations from more stimulus from the Federal Reserve, it is likely that a disappointing print spurs some risk-appetite, with the US Dollar selling off thereafter. If the print beats, expect the US Dollar to steady or enhance its gains. The key pair to watch is USDJPY.
EURUSD: Yesterday I wrote “more sideways price action in the EURUSD as the 20-DMA provided support today; though the rally off of the July 24 low appears to be corrective in nature, with three waves evident from the bottom (A-B-C correction). This suggests that further downside is likely; in our opinion, this translates to one more new low near the 2010 low of 1.1875 before the start of the next major bull leg. A drop towards 1.1695-1.1875 remains likely by mid-September. Near-term resistance comes in at 1.2310/30, 1.2400/05, and 1.2440/45. Daily support comes in at 1.2200/20 and 1.2155/70. The Inverse Head & Shoulders (Head at 1.2040/45, Neckline at 1.2400/05, Measured Move 1.2750/60) remains a potential outcome.”
USDJPY: A pattern long in the making, the USDJPY Inverse Head & Shoulder formation that has been in wait-and-see mode remains valid so long as the Head at 77.60/70 holds. Indeed, it has, and after the Fed meeting and the July Nonfarm Payrolls two-weeks ago and the disappointing second quarter Japanese GDP this week, the USDJPY is constructive in the neat-term, fundamentally. Accordingly, with the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.15/20 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. On the hourly charts, it appears a Rounded Bottom is forming (yesterday was the highest exchange rate since July 20), and we are thus biased higher for now.
GBPUSD: Last week I wrote “the muddle sideways continues, leaving little changed of our outlook for the GBPUSD. Overall, our outlook unchanged from Monday [August 6]. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5580/85 (50-DMA) would be bearish, whereas a close below 1.5490/1.5520 would be very bearish (as it would represent a break of the channel as well as last week’s lows).” Our view remains. Near-term resistance is 1.5700/05 (August high), 1.5720 (200-DMA), and 1.5755/70 (July high, 100-DMA). Daily support is 1.5620/25 (10-DMA, 20-DMA) 1.5575/80, 1.5490/1.5520, then 1.5450/60 (July 25 low).
AUDUSD: Last week I wrote “the pair’s exhaustion above 1.0600 (failure to see a daily close above said level) has stoked a pullback, and with a fundamental catalyst (Chinese worries), near-term price action is biased lower.” Prices continue to consolidate, and it very much appears that a Top is being formed on the 4-hour charts. Near-term resistance comes in at 1.0535/45 (former swing highs), 1.0580, 1.0600/15 and 1.0630. Daily support comes in at 1.0480/1.0500 (last week’s low), 1.0435/45, and 1.0380/85.
--- Written by Christopher Vecchio, Currency Analyst
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