Euro Rebound Merely Corrective as British Pound Lags on 2Q GDP

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By Christopher Vecchio, DailyFX Currency Analyst

The Euro hit fresh 2012 lows across the board yesterday but with an exceptionally bearish sentiment evident across the market, it was likely that only a small bit of positive news would propel the Euro higher. Indeed, after European Central Bank policymaker Ewald Nowotny said that there were improved arguments in favor of giving the European Stability Mechanism (ESM) a banking license. While this would help ease financial stresses in Europe, it would not solve the oncoming recession across the continent. Speaking of recession, the British economy stumbled further in the second quarter, raising the likelihood of more accommodative measures by the Bank of England going forward; any measures would be dilutive of the British Pound, and as such, the world's oldest fiat currency has underperformed throughout the European trading session.

The comments from the European Central Bank policymaker have eased concerns over peripheral European debt thus far on Wednesday. The Italian 2-year note yield has fallen to 4.848% (-15.7-bps) while the Spanish 2-year note yield has pulled back to 6.480% (-16.7-bps). Similarly, the Italian 10-year note yield has receded to 6.427% (-11.9-bps) while the Spanish 10-year note yield has eased to 7.429% (-8.2-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:40 GMT

EUR: +0.70%
CHF:+0.70%
AUD: +0.60%
CAD: +0.39%
NZD:+0.31%
GBP: +0.02%
JPY: -0.04%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.33%(+0.53% past 5-days)

ECONOMIC CALENDAR

A quiet North American trading session is on the horizon with only one event of any interest on the DailyFX Economic Calendar for today. At 10:00 EDT / 14:00 GMT, USD New Home Sales for June are due, and a slight +0.4% gain is expected. A strong figure will yield a stronger US Dollar while a weak print will raise QE3 speculation, which will hurt the US Dollar.

TECHNICAL OUTLOOK

EURUSD:

After dipping as low as 1.2042 on Tuesday, the pair has since rebounded towards former yearly lows (and July swing lows) at 1.2160/70. The bounce comes on hopeful comments, so we expect the move to be faded. Near-term resistance comes in at 1.2160/70 then 1.2195/1.2200 (10-DMA). Further above, 1.2220/60 is chocked full of hourly resistance/support; daily advances should be capped in this area and should be sold. Support comes in at 1.2110/15 and 1.2040/50 (Bollinger Band, new July lows). We expect buying interest around the psychologically significant 1.2000 figure. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875.

USDJPY:

Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. Watch the 5-DMA (78.35) for advances; the USDJPY hasn't closed above the 5-DMA since July 11.

GBPUSD:

Yesterday's Inside Day yielded some price action to the upside but advances have been stunted by the poor second quarter growth reading for the British economy. The 10- and 20-DMAs broke with ease on Monday and the GBPUSD has consolidated around the 1.5500 handle thus far todau. We expect further losses as a steep rising trendline has now been broken. Near-term resistance comes in at 1.5570/85 (trendline resistance, 10-DMA, 20-DMA, 50-DMA) and 1.5600. Near-term support comes in at 1.5460/70 (coincidentally today's low) then 1.5390/1.5405 (monthly low, Bollinger Band).

AUDUSD:

The pair is respecting an ascending channel off of the June 20 and July 5 highs, hitting resistance on Thursday/Friday leading to the sell-off today. The AUDUSD hit support at 1.0180/95 (channel support, 100-DMA) and has rebounded sharply, back to interim resistance at 1.0275/85 (10-DMA, 200-DMA). If there is a daily close above said level, the scope for gains is as high as 1.0500, given the ascending channel in place.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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