Euro Plummets as Growth Across Continent Contracts to Crisis Levels
ASIA/EUROPE FOREX NEWS WRAP
Yesterday, it was the British Pound’s turn to take a nose dive, falling apart after the dovish Bank of England Quarterly Inflation Report. Today, feeling left out in the race to the bottom, the Euro decided to join the ‘party,’ sliding by nearly a full percentage point against the US Dollar and to under 1.3350 – well-off its February 1 high of 1.3710 – as a bevy of important Euro-zone growth data disappointed across the board.
Not one single aspect of any 4Q’12 GDP data this morning – not on a quarterly or yearly basis, not from France, Italy, Germany, or the broader Euro-zone itself – beat consensus expectations provided by Bloomberg News. And yet what do European officials have to say? “We are aware the economic activity remains weak,” but, the data “are broadly in line with our expectations,” said Simon O’Connor, a spokesman for the European Union Economic and Monetary Commissioner Olli Rehn. Maybe this is the confirmation that the EUR/USD top is in place, something I conjectured on February 4.
This political complacency towards the weak growth situation across the continent is troublesome, because it not only confirms that the attitude of ‘just doing enough to satiate markets’ is persisting, but it means that the impetus to save the Euro-zone remains in the European Central Bank’s hands. While this is a burden that they undertook by promising to do “whatever it takes” to save the Euro, it now means that calls for an interest rate cut are likely to increase in the coming week. Until there is further policy clarification from President Mario Draghi, there will be an inherent underlying dovish push against the Euro in this regard. This should at least counterbalance any upside afforded by the LTRO repayments coming in. Focus is now on the Italian elections on February 24 and 25, which offers further downside in the Euro should Silvio Berlusconi win (polls currently have him trailing by -3.7%, within the +/-4% error margin).
Taking a look at European credit, peripheral yields have compressed despite the weak data, though the Euro has seemingly disconnected. The Italian 2-year note yield has fallen to 1.543% (-2.3-bps) while the Spanish 2-year note yield has decreased to 2.471% (-1.3-bps). Likewise, the Italian 10-year note yield has decreased to 4.383% (-0.4-bps) while the Spanish 10-year note yield has increased to 5.186% (+0.6-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:55 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.17% (+0.28 % past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: Maintaining the same bias as the move to 1.3280/300 has yet to be completed: “Price has steadied below 1.3400, entering the Bull Flag range set in mid-January, from 1.3280 to 1.3390. On lower-term timeframes, a Bear Flag may have formed, with the measured move pointing to 1.3280/300. A break lower can’t be ruled out, but as long as the ascending trendline off of the mid-December and early-January lows holds at 1.3215/35, any setbacks are seen as near-term corrections.”
USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again.” Resistance comes in at 93.40/45 (monthly R1), 93.85 (weekly R1) and 94.00/10. Support comes in at 92.90/95 (weekly pivot), and 91.75/95 (weekly S1).
GBPUSD: The pair is reaching overextended levels to the downside on the 4H timeframe, as the GBPUSD slid to under 1.5500 today for the first time since August. With the pair now having fallen by over -800-pips since the first trading day of the year, it could be time to take profit.A rally back into 1.5750/800 shouldn’t be ruled out before a move towards 1.5265/70, the June low. Resistance comes in at 1.5570/80 (monthly S1) and 1.5675. Support is 1.5480/500 and 1.5380.
AUDUSD:Tuesday I said: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension.” Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.
S&P 500: Tuesday I said: “as indicated on the charts the past weeks, noting “nearing the top 1505/1512” – the top was 1504.6. If this breaks, 1520 is in sight.” Indeed, the irrational exuberance has continued, bringing topline Bearish Rising Wedge resistance in focus at 1520; the December 2007 highs of 1520/24 could be reached on an overshoot. The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality.
GOLD: The past few weeks I’ve maintained: "When considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at [1630/40].” A daily close above 1700 points towards 1722/25 and 1755. Support is 1640/45 and 1625/35.
--- Written by Christopher Vecchio, Currency Analyst
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