Euro Rally Impressive But Lacks Bite; Risk Correlated Assets Still Exposed

Text goes here

In this Issue...

Get up to date - Breaking News

Read what our Top Contributors are saying

By Joel Kruger, DailyFX Technical Strategist

Talking Points

Euro well supported by 1.3000 for the time being

Fundamental outlook still favors more risk liquidation

Solid retail sales puts more pressure of Fed to reverse

Spanish yields still at elevated levels; Euro bearish

RBA Minutes come in on dovish side; more rate cuts ahead

USD/JPY expected to find support over coming sessions

In Monday's commentary we warned that the daily close was critical before making any fresh trading decisions and this proved to be an effective strategy, with the break in EUR/USD below 1.3000 failing to generate any initial downside follow through, before a surge into the latter half of the day just shy of 1.3150. We also recommended keeping a close eye on US equity markets, and here too the price action was somewhat ambiguous, with the S&P and Nasdaq closing lower on the day, despite some decent gains in the Dow. Overall, there are still no clear signs of any reason to see a departure from our bullish US Dollar and bearish global macro fundamental outlook discussed on Monday, and we suspect that any rallies in the Euro or equities should soon be met with renewed offers.

US retail sales data was solid, to reaffirm the newly adopted more hawkish Fed slant, while Spanish yields remained above 6% to remind us of the ongoing stress in the Eurozone. We also highlighted our concern of the impact of the China slowdown on commodity bloc and emerging market economies, and the release of the latest dovish RBA Minutes early Tuesday, only helps to strengthen this outlook. The Australian central bank has left the door wide open for additional rate cuts at the upcoming meeting, should inflationary pressures show signs of moderation. The local economy has already been slowing in reaction to the China cool down, and we project more relative underperformance ahead. Therefore, Aussie rallies should continue to be sold in anticipation of a sustained break back below parity over the coming weeks and maybe even days.

For now, we will keep a close eye on EUR/USD. Despite the latest surge, overall price action is still quite bearish while below 1.3215, and only a break and close back above this level would delay the outlook. We would not rule out the possibility for a bit more of a short squeeze on Tuesday towards 1.3200, but any rallies beyond the figure should be well capped. A break back below 1.2990 will really put the pressure on the downside and likely leads to an acceleration of broad risk liquidation that opens an immediate retest of the early 2012 lows by 1.2660.

Elsewhere, it will be interesting to see how USD/JPY responds from here. While there are still remnants of correlation with risk off price action to Yen outperformance, we contend that this correlation has more or less faded, and as such, any additional strength in the Yen from here should be met with strong offers. USD/JPY has dropped back into the 80.00 area, and the correction off of the 2012 highs by 84.20 could be close to reaching its course. Technically, the pair is now testing some solid support by both the daily and weekly Ichimoku cloud tops, and we will be on the lookout for a bullish resumption over the coming sessions.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD:

The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines.

GBP/USD:

Failure to establish any fresh momentum on the recent break above 1.6000, followed by an aggressive bearish reversal, now suggests that the market could finally be looking to carve a top in favor of a more significant decline over the coming sessions. Look for a break and close below next support at 1.5800 to reaffirm outlook, while back above 1.6065 would be required to negate.

USD/JPY:

The market continues to correct from the recent 2012 highs established at 84.20 several days back, and risks still exist for additional setbacks into the 79.00-80.00 area before considering a bullish resumption. Overall, our outlook is highly constructive and we see the pair in the process of carving a longer-term base ahead of the next major upside extension into the 85.00-90.00 area. We would therefore expect to see the shaping of a fresh medium-term higher low over the coming days somewhere in the 79.00-80.00 area. Ultimately, only below 78.00 delays outlook and gives reason for concern.

USD/CHF:

Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.

--- Written by Joel Kruger, DailyFX Technical Currency Strategist

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Any opinions, news, research, analyses, prices, or other information contained in this email are provided as general market commentary, and do not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The content in this email is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. Dailyfx has taken reasonable measures to ensure the accuracy of the information, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the content, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this email. Please read the full disclosures here. Additionally, Dailyfx takes your privacy seriously. Please click here to read our privacy policy.

Valuable Resources