Forex: Euro Extends Losses Ahead of ECB Meeting
ASIA/EUROPE FOREX NEWS WRAP
Risk-aversion has been the prevailing theme this week, with the Japanese Yen and the US Dollar continuing to outpace their respective counterparts while high beta currencies and risk-correlated assets, in particular the Euro and the S&P 500, have struggled to retain any footing in November. The causes for concern have been two-fold in nature: a worsening European sovereign debt crisis; and the notion that the US fiscal cliff is right around the corner.
While these events have stoked demand for safety, in particular lower yielding currencies and precious metals, our focus today is on the European Central Bank, which has its monthly Rate Decision meeting today at 07:45 EST / 12:45 GMT, followed by President Mario Draghi’s press conference at 08:30 EST / 13:30 GMT. The ECB has yet to be active in Italian or Spanish bond markets following President Draghi’s promise to save the Euro via “whatever it takes,” but this isn’t a surprise given that neither country has sought an international bailout yet.
With no new measures expected to be announced today and Spain continuing to sidestep the idea of a bailout – something that looks necessary to keep a lid on investors’ fears but will be nothing short of self-mutilation for the Rajoy-led government – the investment climate is looking fragile this morning.
Nevertheless, if the market was in true panic mode, there would be a greater shift into the Yen and the US Dollar, with Gold and Silver selling off as well as investors hoards liquidity; this hasn’t happened. Finally, as noted in the technical section below, the S&P 500 has held fairly significant trendline support, and without a catalyst, a further breakdown may be staved off in the near-term.
Taking a look at credit, weakness in periphery yields continues to weigh on the Euro. The Italian 2-year note yield has increased to 2.118% (+1.8-bps) while the Spanish 2-year note yield has increased to 3.102 % (+6.1-bps). Likewise, the Italian 10-year note yield has increased to 4.951% (+5.6-bps) while the Spanish 10-year note yield has decreased to 5.770% (+10.7-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 11:30 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.04% (+0.54% past 5-days)
See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
TECHNICAL ANALYSIS OUTLOOK
EURUSD: Yesterday I said that: “Late-September and early-October swing lows have broken and a deeper retracement is looking possible now that the consolidation is failing off of the September 17 and October 17 highs, and the October 1 low.” Price action remains biased to the downside as the EURUSD is struggling at at 1.2750, mid-June swing highs and the early-September “pause” the EURUSD experienced. Support comes in there (breaking now), 1.2630/45 (100-DMA), and 1.2400/35. Resistance is 1.2820/30 (mid-October swing low, 200-DMA), 1.2880/1.2900, and 1.3015/20 (last week’s high).
USDJPY: Price continues to trade lower from key resistance in the 80.50/70 zone (mid-June swing high), and the pace at which price has advanced is started to crack. Support is 79.60/85 (20-EMA, 200-DMA) and 79.10/30. Resistance is at 80.00, 80.50/70, and 81.75/80 (mid-April swing high).
GBPUSD: No change from Tuesday: “While the GBPUSD appeared to be moving to breakout of its recent downtrend, an Inverted Hammer on November 1 has biased the pair to the downside. For now, we are neutral if not looking lower.” Resistance comes in at 1.6015 (50-EMA), 1.6040 (20-EMA), and 1.6170/80 (last week’s highs). Support is 1.5910/15 (October low) and 1.5845/60 (100-DMA, 200-DMA).
AUDUSD: Price has barely budged the past 24-hours, leaving my outlook unchanged: “Although the AUDUSD traded back to its highest level since late-September, an Inverted Hammer [formed] on the daily chart at key resistance [yesterday], suggesting a near-term dip is possible; confirmation [today] is required. Support is close by at 1.0330/50 (20-EMA, 50-EMA, 100-DMA, 200-DMA) and 1.0310/05 (ascending trendline off of June 1 and October 23 lows). Resistance is at 1.0405/50 (former swing highs and lows, October high) and 1.0500/15.”
S&P 500: Nothing has changed: “A short-term top is potentially in place after support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows) broke [on October 23] following tests on three occasions the past two weeks.” Targets near 1355 would come into focus if price breaks below the monthly S1 at 1399. Support comes in at 1390/95 (100-DMA), 1382 (200-DMA), and 1350/55 (monthly S2, ascending channel support off of November 2011 and June 2012 lows). Resistance comes in at 1425 (20-EMA, 50-EMA), 1460, 1470, and 1498/1504.
GOLD: Gold has rebounded to fresh November highs and is back above 1715; my bias is back to neutral and increasingly bullish. I still expect the 1700 area to be defended vigorously, and look to get long as low as 1680. Resistance is 1700, 1715, 1735, 1755/58 and 1785/1805. Support is 1680 and 1660/70 (100-DMA, 200-DMA).
--- Written by Christopher Vecchio, Currency Analyst
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