Eurozone Leadership Needs to Step Up in A Big Way; We Think They Will

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By Joel Kruger, DailyFX Technical Strategist

Talking Points

If there is one thing that has been fairly consistent throughout the crisis, it has been the ability for governments to appease markets and respond to pressure. At least this has been the clear response from the US and UK throughout the economic downturn. Eurozone leadership on the other hand has had a more difficult time accepting this strategy. But, perhaps Eurozone leadership should be more comfortable subscribing to this ultra-accommodative policy stance as it seems as though every time the US or UK have stepped in to offer some form of further accommodation, sentiment has been bolstered and risk correlated assets have rallied. However, there has been reluctance of Eurozone leadership to fully embrace this strategy, and this could very well be what is exacerbating the situation. We believe that a combination of a deep rooted European Central Bank mandate that places a higher importance on longer-term inflationary threats, and a disjointed Eurozone made up of several different countries are the primary obstacles to a full on adoption of an ultra accommodative policy.

Yet now is the time when Eurozone leadership needs to step up and more aggressively implement this strategic approach to dealing with the crisis. Failure to come up with a meaningful resolution over the coming days will result in a major blow to the Eurozone economy that will be extremely difficult to overcome. As such, we have finally reached a critical inflection point where the fate of the region rests on its leadership to band together and push forward as one cohesive unit. At this point, we believe that the markets will indeed be pleasantly surprised and a favorable resolution will be put forward that ultimately opens the door for some renewed optimism. This certainly coincides with our short-term bullish outlook on the Euro, which we still feel has room to extend towards 1.3000 before finally finding some legitimate offers.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD:

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. Despite the latest pullback, the market still looks constructive in the short-term while above 1.2440 on a daily close basis. Nevertheless, a break and close back above 1.2585 will now be required to accelerate gains. Daily close below 1.2440 negates.

USD/JPY:

Some very constructive price action in recent sessions with the market clearing some critical short-term resistance by 79.80 and then breaking back above psychological barriers at 80.00. This now opens the door for a potential medium-term higher low in place by 77.65 ahead of the next major upside extension back towards and eventually above the 2012 highs by 84.20. Setbacks now expected to be well supported above 78.50.

GBP/USD:

Despite some intraday pullbacks, the bullish correction since early June remains alive, and we still see room for additional upside beyond 1.5780 and towards 1.6000 over the coming days. Ultimately, any additional declines are expected to be well supported around 1.5500, while only back under 1.5450 would compromise the outlook.

USD/CHF:

While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, there still seems to be room for additional short-term declines while the market trends lower from the peak in early June. Ultimately, a break back over 0.9660 would be required to end the short-term bearish correction and open the door for broader bullish resumption. Until then, risks remain for a deeper pullback towards the 0.9200-0.9300 area.

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

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