Majors Consolidate Further Against US Dollar as AUD, EUR Stall at Resistance

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By Christopher Vecchio, DailyFX Currency Analyst

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has fallen back to its lowest level since mid-May as the Euro-zone's issues have seemingly faded away over the past few days. Nonetheless, with short-term Italian and Spanish yields back on the rise, the majors have consolidated against the US Dollar. The British Pound has led the gainers on the back of stronger than expected Industrial Production and Manufacturing Production data from June (although both reports showed steep declines nonetheless), while the commodity currencies have been buoyed by a neutral Reserve Bank of Australia policy statement (if Australia finds its growth forecast remains on target, demand for commodities will remain as is, which in turn offers implicit support for the Canadian and New Zealand Dollars). Ahead of the Bank of Japan Rate Decision on Thursday, the Japanese Yen has led to the downside, barely.

In part, we suspect that the lack of upside momentum in the Euro can be attributed to the underperformance of Italian and Spanish debt. The Italian 2-year note yield has rebounded to 3.164% (+16.0-bps) while the Spanish 2-year note yield has risen to 3.543% (+17.1-bps). On the longer-end, the Italian 10-year note yield has fallen to 5.915% (-4.3-bps) while the Spanish 10-year note yield has inched up to 6.706% (+5.2-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:25 GMT

GBP: +0.36%

CAD:+0.23%

AUD:+0.20%

EUR:+0.16%

CHF:+0.16%

NZD:+0.11%

JPY: -0.06%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.20% (-0.34% past 5-days)

ECONOMIC CALENDAR

The docket remains thin on the US side, but there are some interesting releases elsewhere for the remainder of trading on Tuesday. At 10:00 EDT / 14:00 GMT, the GBP NIESR Gross Domestic Product Estimate for July is due, and while no forecast is provided, our model shows contraction of -0.1% to -0.3%. 2012 hasn't been a kind year for the British economy, with the NIESR GDP Estimates showing growth only once thus far, and with three of the six readings showing contraction of -0.3% or greater. Should the British economy continue to struggle, this will likely amount to increased odds of further easing by the Bank of England, which will dilute the value of the British Pound. At 15:00 EDT / 19:00 GMT, the USD Consumer Credit report for June will be released, and it is expected to show tighter credit (perhaps a slowdown in non-revolving debt).

TECHNICAL OUTLOOK

EURUSD:

The pair is working on an Inside Day (with today's highs and lows within yesterday's highs and lows) given a lack of a fundamental catalyst on for either the Euro or the US Dollar; indeed, the underlying upside momentum from Friday keeps pushing the EURUSD higher. Accordingly, our outlook is little changed from yesterday, when fresh monthly highs were set 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:

Like the EURUSD, the GBPUSD has been working on an Inside Day. Accordingly, our outlook from yesterday is unchanged. 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 1.0603 today, finally breaking last week's post-ECB high of 1.0580 on the back of a decisively neutral Reserve Bank of Australia. 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), 1.0600/05 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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