The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is back near its July lows as USDJPY weakness spurred on by disappointing Japanese election results has weighed on the world’s reserve currency across the board. Ahead of the elections, the Yen was mostly weaker amid speculation that not only would Japanese Prime Minister Shinzo Abe’s LDP party win seats in the upper house, but it would secure victory with an outright majority. Accordingly, the news that a coalition will be formed has stoked a kneejerk reaction in the Yen-crosses.
Last week I said that “I think that an Abe victory has been mostly priced into the USDJPY at this point – it retained ¥100.00 this week – and while that might mean any further upside in the pair is limited, the quicker round two of Abenomics arrives, the greater chance of a weaker Yen.” I retain this bias, and point out that no outright majority means that the burden of further accommodation doesn’t just fall on fiscal policymakers, but on monetary policymakers as well; and therefore we shouldn’t expect dovish saber-rattling to cease anytime soon. Similarly then, any near-term USDJPY weakness is likely transitory.
Looking ahead to the economic docket for today, after no significant data on the European calendar, the North American session looks to be calm as well with only two ‘medium’ ranked events due up. Today’s housing data has the potential to be market moving, as the most recent bout of housing data released last Wednesday was not only horribly disappointing, but it was also covered up by Fed Chairman Bernanke’s commentary. Another soft housing print for June could leave the US Dollar on soft footing to start the week.
Read more: Euro and Sterling to Outperform versus AUD
Taking a look at European credit, further relief in Portuguese debt has pushed peripheral yields lower and the Euro higher to start the week. The Italian 2-year note yield has decreased to 1.549% (-4.3-bps) while the Spanish 2-year note yield has decreased to 1.860% (-3.1-bps). Likewise, the Italian 10-year note yield has decreased to 4.340% (-5.9-bps) while the Spanish 10-year note yield has decreased to 4.596% (-6.4-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:35 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.29% (-0.83% prior 5-days)
See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.
TECHNICAL ANALYSIS OUTLOOK
EURUSD: The path appears to be up first before down, and last week’s observation that “a break of $1.3175/245 puts 1.3300 and 1.3400/20 in focus” will come to fruition before any additional downside. Furthermore, continued failed probes below 1.3000 suggest longer-term technical bullishness that would invalidate the previously discussed Head & Shoulders pattern. Price is trading within the July 11 candle range for the seventh consecutive day, but a Bull Flag on lower timeframes (H1, H4) indicates the consolidation could end early this week.
USDJPY: No change as prices have ranged the past two weeks: “The rejection of the 76.4% Fib retracement at ¥101.35/40 (May high to June low) is only a near-term setback, as the break off of the late-May to mid-June correction in the pair completed the last week of June. …longs preferred into early next week. Indeed, the 50% retracement of the June low to July high at 98.75 held as support and the pair has already bounced higher; a run at 102.00 shouldn’t be ruled out this week. A daily close below 98.75 negates this bias; a move to 97.00 would be anticipated on a reversal lower.” A potential Evening Star candle cluster (Bearish Reversal) is forming on the daily chart.
GBPUSD: Last week I said that “a rebound could see the pair back up towards $1.5390/400 (38.2% Fib yearly high/low, 61.8% Fib June high to July low), which has proven to serve as both support and resistance since April.” Indeed, the break of 1.5275/300 (former July highs) puts said level in focus higher; this would be a near-term selling point as the lower timeframes (H1, H4) become overbought in RSI and Slow Stochastics.
AUDUSD: Despite chopping around and through said level, the AUDUSD has more or less held the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie. A Bullish Broadening Wedge may be forming at the lows as a base; 0.9750/75 would be the target on a close above 0.9415.
S&P 500: The past two weeks I’ve maintained that “a test of the yearly and all-time high at 1687.4 shouldn’t be discounted yet. 1640 is key support for bulls.” Fresh all-time highs has the S&P 500 on track for a break of 1700; and given price action since April, 1710/15 looks to be resistance (100% Fib extension April 18 low to May 22, June 24 extension). 1670 is now support followed by 1640.
GOLD: The past several weeks I’ve said: “Gold has fallen into the 10/20 RSI support region, where price has held on numerous probes lower ultimately producing a short-term rally. More recently, daily RSI has only dipped into this region in mid-February and mid-April…Basing just below $1200/oz shouldn’t be dismissed, as at 1189.91 lies the 100% extension of March high/April low/April high move, as well as the 61.8% extension of the October high (post-QE3 announcement)/April low/April high move at 1192.” With a break of 50 on the daily RSI – which has helped contain Gold for the past three-plus months – a test of 1325/30 is in order (former swing lows mid-April and mid-May, 23.6% Fib Oct’12 high to Jun’13 low).
--- Written by Christopher Vecchio, Currency Analyst
To contact Christopher Vecchio, e-mail firstname.lastname@example.org
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form