Quiet Week Heads Towards Finish with Euro, US Dollar Leading Majors

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By Christopher Vecchio, DailyFX Currency Analyst

Most of the majors consolidated in the overnight, with very tight ranges - in some cases, the smallest range of the week - transpiring amid what could perhaps be the last day of lower volumes across the globe. Risk-appetite remains dampened despite improvements in European funding costs, though this has to do with the strength of the US Dollar and a lack of any upside momentum in European cash equity markets or US equity market futures.

Overall though, we suspect that volatility and volume will begin to rise next week, now that German Chancellor Angela Merkel has returned from vacation (and emerged in Canada, of all places). Accordingly, the European sovereign debt circuit heats up when French and German leaders will convene with Greek Prime Minister Antonis Samaras to discuss the failed Greek state, and what needs to be implemented in order to move closer towards a third bailout for the embattled Southern European sovereign.

In part, we believe that the fall in peripheral European bond yields has aided the Euro's advance today. The Italian 2-year note yield has dropped to 3.053% (-10.0-bps) while the Spanish 2-year note yield has slid to 3.611% (-18.1-bps). Likewise, the Italian 10-year note yield has fallen to 5.760% (-0.8-bps) while the Spanish 10-year note yield has eased to 6.379% (-9.4-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:30 GMT

EUR: +0.13%

CHF:+0.13%

CAD:-0.05%

JPY:-0.11%

GBP:-0.15%

NZD:-0.31%

AUD: -0.60%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.19% (+0.39% past 5-days)

ECONOMIC CALENDAR

The week rounds out with three reports that could generate some additional volatility in the currency markets, with data due from Canada and the US. At 08:30 EDT /12:30 GMT, the CAD Consumer Price Index for July will be released, and price pressures are expected to have increased slightly in the near-term. At 09:55 EDT / 13:55 GMT, the preliminary USD U. of Michigan Confidence report for August will be released, and no change is expected from July's 72.3 reading. At 10:00 EDT / 14:00 GMT, the USD Leading Indicators for July will be released, and slight growth is expected, though not strong enough to compensate for June's contraction.

TECHNICAL OUTLOOK

EURUSD:

The EURUSD has inched higher today after trading up into key resistance yesterday, and now faces former highs and lows in the 1.2360/80 area. A daily close above this zone brings into focus 1.2405, the potential Neckline on what could be an Inverse Head & Shoulders bottoming pattern. Given the Head at 1.2040/45, this would draw into focus 1.2760 on a daily close above 1.2405. Near-term resistance comes in at 1.2360/80, 1.2405, and 1.2440/45 (August highs). Interim support comes in at 1.2310/30, 1.2250/65, and 1.2155/70.

USDJPY:

A string of better than expected US data has shifted the fundamental bias of this pair, and indeed, the Rounded Bottom on the hourly charts has materialized a bullish outcome, as expected. This could be the first step towards the USDJPY Inverse Head & Shoulder formation playing out. With the Head at 77.60/70 and the Neckline at 80.60/70, this suggests a measured move towards 83.60/70 once initiated. The daily close above 79.15/20 (200-DMA) yesterday, in our opinion, brings near-term resistance in focus at 79.60/65 (100-DMA). Interim support comes in at 79.15/20, 78.60 (former swing lows) and 78.10/20 (lows from last week).

GBPUSD:

The muddle sideways continues, leaving little changed of our outlook for the GBPUSD. Overall, our outlook is little changed from Monday [August 6]. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5595/1.5600 (50-DMA, short-term channel support) would be bearish, whereas a close below 1.5490/1.5520 (former swing lows) would be very bearish (as it would represent a break of the channel as well as the August lows). Near-term resistance is 1.5700/05 (August high), 1.5715/20 (200-DMA), and 1.5755/70 (July high, 100-DMA). Daily support is 1.5625/40 (10-DMA, 20-DMA) 1.5575/80, 1.5490/1.5520, then 1.5450/60 (July 25 low).

AUDUSD:

The top that we posited that was forming on the 4-hour charts is close to being confirmed, now that prices have broken below 1.0500; ideally, a daily close below 1.0435/40 (August low) would confirm. At current price, near-term support comes in at 1.0435/45 and 1.0380/85, though with shorter-term timeframes showing exhaustion, we suspect a bounce could be had first. Near-term resistance comes in at 1.0480/1.0500, 1.0535/45 (former swing highs), 1.0580, 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0195/1.0200 (100-DMA).

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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