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FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

Christopher Vecchio, CFA, Senior Strategist


High beta currencies and risk-correlated assets are moving sideways into the US trading session, as the light economic docket in both Asia and Europe has produced the necessary calm for technical rebounds in the weaker FX majors this year, the British Pound and the Japanese Yen. Certainly, in neither of these currencies’ situations, has there been a material improvement in the rate conditions or economic data that would mark the potential for near-term (>1-week) bottoms.

While I still like both the British Pound and the Japanese Yen weaker throughout 2013, I recognize the significantly overstretched technical conditions to the downside in these currencies, so we thus must respect the potential for corrections. In GBPUSD, a run towards 1.5200 shouldn’t be ruled out, given the Bullish Falling Wedge on the 4H chart. In USDJPY, a dip towards 94.60/5.10 would be the initial opportunity to rebuy. The technicals, however, will be forced to cope with what could be a potentially bullish batch of data this morning for the US Dollar.

As I noted in this week’s Top 5 Key Events report, “The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In February, consumption rebounded, with the strengthening US consumer powering through the payroll tax increase at the start of the year. According to a Bloomberg News survey, Advance Retail Sales increased by +0.5% m/m after a +0.1% m/m increase in January. If consumption continues to rebound, it means that consumers are looking past the government’s self-imposed austerity stumbling block, meaning the economy could be poised to strengthen through 2013.” On a print of +0.5% m/m or greater, I’ll be looking for US Dollar strength, especially against the British Pound, the Euro, and the Japanese Yen.

Taking a look at European credit, peripheral yields have shot up this morning, preventing the Euro from breaking out against the US Dollar. The Italian 2-year note yield has increased to 1.839% (+10.4-bps) while the Spanish 2-year note yield has increased to 2.217% (+3.8-bps). Similarly, the Italian 10-year note yield has increased to 4.678% (+8.2-bps) while the Spanish 10-year note yield has increased to 4.724% (+1.7-bps); higher yields imply lower prices.


GBP: +0.46%

JPY: +0.29%

CHF: +0.01%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.07% (+0.20% past 5-days)


FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_7.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.


FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_6.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

EURUSD: No change: “Although the move higher was cued by the breakout in RSI a few days ago, the NFP print could derail the uptrend with ease…Certainly, this proved to be the case, with the reversal on Thursday completely reversed on Friday. I will continue to respect the downtrend off of the February 1 and February 13 highs, though remain open to a bullish outcome: a Bullish Falling Wedge (reversal pattern).” Resistance is at 1.3040/50 (8-EMA), 1.3080/100, and 1.3130/40 (March swing highs, 21-EMA). Support comes in at 1.2950/70 and 1.2870/85

FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_5.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

USDJPY: No change: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher.” Downside pressure has been prevalent again on Wednesday, though bulls continue to fight the downturn and hold the pair just under 96.00.

FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_4.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

GBPUSD: There is potential for a GBPUSD reversal over the coming days, as exhibited by the Bullish Falling Wedge on the 4H chart, which could lead to a run up towards 1.5200 or 1.5300 on an overshoot. Reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300. Resistance comes in at 1.4950/70 (descending trendline off of the February 8 and March 5 swing highs) and 1.4990/5000 (8-EMA, psychological level). Support comes in at 1.4830/40, 1.4780/80, and 1.4250/300.

FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_3.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

AUDUSD:Although the daily RSI broke above the key 47/50 area, bearish RSI divergence has emerged on a lack of follow through overnight. Still, with consolidation above the March low, the close above 1.0230/50 yesterday shifts near-term focus towards 1.0340/80. The daily RSI has confirmed the near-term move higher towards 1.0340/80; failure would put the lows back in focus. A break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart, adding further evidence for a run back towards the late-January swing highs.

FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_2.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

FX_Weaklings_Continue_Modest_Rebounds_as_US_Dollar_Consolidates_body_Picture_1.png, FX Weaklings Continue Modest Rebounds as US Dollar Consolidates

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

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