Euro Not Going to Fall Off A Cliff Just Yet; Room for Additional Gains

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By Joel Kruger, DailyFX Technical Strategist

Talking Points

Expect choppy directionless trade ahead of key event risk

Euro should remain supported on proponomics

Euro seen to 1.2800-1.3000 before ultimately rolling over

Risk on trade should persist for much of June

German inflation as expected

Eurozone industrial production falls less than expected

The market seems to be settling into a tighter consolidation which could be subject to some jittery directionless, whipsaw volatility ahead of the weekend Greek election. For now, the fate of the Euro seems to be riding on the outcome of this election, and with other peripheral Eurozone economies under pressure, a result which leads to a Grexit would likely open the door for a serious liquidation in the Euro towards and potentially below 1.2000. However, we do not think it will play out this way, and instead look for the market to continue to find support as the stabilizing impact of government proponomics can not be ignored. With Spanish 10-Year yields back by the 7% handle, and with other countries like Italy now coming into the spotlight, we have a hard time seeing a situation where Eurozone officials don't step up and do everything in their power to keep the local economy propped.

Relative performance versus the USD Wednesday (as of 10:10GMT)

CHF +0.36%
EUR +0.35%
NZD +0.33%
AUD +0.25%
CAD +0.10%
GBP +0.06%
JPY -0.13%

As reflected by the latest Spanish bank bail-out, EU officials will ultimately step in and inject markets with as much stimulus as needed to keep the Eurozone economy from falling off a cliff. If need be, there will also be a coordinated global effort to keep the Eurozone economy supported as it is in the best interests of all parties. Instead, we look for a scenario where the outcome of the Greek election is encouraging and opens the door for a short-term surge in risk correlated assets. We project this could take the Euro back towards 1.3000 from where the more worrying longer-term fundamental deficiencies will once again take hold as markets realize that the Eurozone still will take a long time to return to prosperity, and deeper risk of contagion to China, and the emerging markets is still something that should be recognized. In short, we look for more risk on trade in the month of June as the worst case scenarios are priced out, before a resumption of risk off trade into July on a realization that just because the worst case is priced out doesn't mean that things are good.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD:

The market is in the process of correcting from some violently oversold levels after breaking to yearly lows just under 1.2300. While our overall outlook remains grossly bearish, from here we still see room for short-term upside before a fresh lower top is sought out. Look for the latest positive weekly close to open the door for acceleration into the 1.2800-1.3000 area, where fresh offers are likely to re-emerge. Setbacks should be well supported ahead of 1.2400.

USD/JPY:

The latest setbacks have been rather intense, with the market collapsing through the 200-Day SMA before finally finding support by 77.65. We have since seen attempts at recovery and we contend that the market should continue to break higher, with sights ultimately set on a retest and break of the 2012 highs by 84.20 further up. However, at this point, we will need to see a break and close back above 80.00 to officially alleviate downside pressures and reaffirm bullish outlook.

GBP/USD:

Daily studies are now correcting from oversold and from here risks seem tilted to the upside to allow for a necessary short-term corrective bounce after setbacks stalled just shy of the 2012 lows from January. Look for the latest daily close back above 1.5440 to strengthen short-term bullish outlook, with acceleration projected into the 1.5800 area where a fresh lower top will be sought out in favor of underlying bear trend resumption. Only a close back under 1.5400 delays.

USD/CHF:

While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, shorter-term risks are for more of a corrective pullback to allow for the market to establish a fresh higher low. As such, we see risks for weakness over the coming sessions towards the 0.9200-0.9300 area before the market looks to reassert its bullish momentum and broader uptrend.

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

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