Euro Pares Gains, Sterling Leads Decline as Market Awaits ECB

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By Christopher Vecchio, DailyFX Currency Analyst

The US Dollar is recouping some of its losses from Friday's reconsideration of European Central Bank Mario Draghi's stance on bond buying to cap Italian and Spanish yields. As market participants await further signs of action, the Euro has dropped modestly; the British Pound has underperformed broadly. Mainly, with a lack of a clear fundamental catalyst in sight, economic data is weighing heavily again, which suggests nothing short of a slowing economic climate sweeping Europe: the British economy, as a proxy to the collateral damage of the crisis, continues to be plagued by a deflation housing market. Overall, the European currencies, the British Pound, the Euro, and the Swiss Franc, are leading the declines, while the Japanese Yen and the US Dollar are among the top performers on Monday.

Despite the small sell-off seen in the EURJPY and the EURUSD, peripheral European sovereign debt continues to strengthen, especially on the shorter-end portion of the yield curve. The Italian 2-year note yield has fallen to 2.982% (-9.2-bps) while the Spanish 2-year note yield has sunk to 3.370% (-44.0-bps). Accordingly, the Italian 10-year note yield has inched higher to 6.019% (+0.9-bps) while the Spanish 10-year note yield has fallen to 6.675% (-9.3-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:20 GMT

JPY: +0.18%

CAD:+0.03%

AUD:-0.17%

NZD:-0.17%

CHF:-0.19%

EUR:-0.23%

GBP: -0.51%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.18% (0.00% past 5-days)

ECONOMIC CALENDAR

The docket is exceptionally thin to start the week, a fitting beginning for the first full week of August given the fact that there are few items of considerable interest expected in the coming days. Nonetheless, Federal Reserve Chairman Ben Bernanke is due to speak at 09:00 EDT / 13:00 GMT on Economic Measurement. Beyond this, we look towards the AUD Reserve Bank of Australia Rate Decision at 00:30 EDT / 04:30 GMT on Tuesday for the next major event on the calendar.

TECHNICAL OUTLOOK

EURUSD:

The EURUSD set fresh monthly highs today at 1.2440/45, a full 400-pips off the 2012 yearly low set just two-weeks ago. Failure above 1.2400 is critical, however, considering the potential for an Inverse Head & Shoulders off the bottom. With the Head at 1.2040/45 and the Neckline at 1.2400/05, the measured move for this potential reversal would be 1.2760. We will respect this on a daily close above 1.2400/05. Near-term resistance comes in at 1.2400/05, 1.2440/45, and 1.2495/1.2505. Daily support comes in at 1.2310/30, 1.2200/20, and 1.2155/70.

USDJPY:

A pattern long in the making, the USDJPY Inverse Head & Shoulder formation that has been in wait-and-see mode remains valid so long as the Head at 77.60/70 holds. Indeed, it has, and after the Fed meeting and the July Nonfarm Payrolls last week, the USDJPY is constructive in the neat-term, fundamentally. Accordingly, with the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.10/15 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. On the hourly charts, it appears a rounded bottom is forming, and we are thus biased higher for now.

GBPUSD:

The GBPUSD has been disappointing today, with the Sterling underperforming across the board. Although Friday's high broke, the swing high pre-FOMC remains intact, leading us to believe the near-term trend is down. For now, with the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5565/85 (20-DMA, 50-DMA) would be bearish, whereas a close below 1.5490/1.5520 would be very bearish (as it would represent a break of the channel as well as last week's lows). Daily resistance is 1.5565/85, 1.5600/05 (10-DMA), and 1.5625/40. Near-term support is 1.5490/1.5520 then 1.5450/60 (July 25 low).

AUDUSD:

The AUDUSD continues to push its ascending channel trendline, moving as high as 1.0578 today, and failing to break last week's post-ECB high of 1.0580. Budding RSI divergence on the 4-hour chart, showing higher highs in price but no confirmation on the RSI, suggests that a pullback may be in the works before a renewed push higher. The 4-hour RSI found support 50, suggesting that the uptrend is very much still intact; any further declines will need a fundamental catalyst; this is very plausible with significant Australian and Chinese event risk on the horizon. Near-term resistance comes in at 1.0580 (August high) and 1.0630. Support comes in at 1.0535/45 (former swing highs), 1.0480, 1.0435/45, and 1.0380/85.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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