Concerns Over Bailout Funds Weigh on Euro, Lift Japanese Yen

Text goes here

In this Issue...

Read what our Top Contributors are saying

By Christopher Vecchio, DailyFX Currency Analyst

The Japanese Yen and the US Dollar are leading the majors today as some risk-aversion has taken hold amid broadening concerns out of Europe. We note that these influences are three-fold: German business sentiment as measured by the IFO dropped further as investors remain reticent despite the European Central Bank's 'bazooka' plan; the German Finance Ministry has dismissed reports suggesting that the European Stability Mechanism (ESM) would be leveraged from €500 billion to €2 trillion to accommodate the future bailouts of Italy and Spain; and media has concentrated on some disagreements between French President Francois Hollande and German Chancellor Angela Merkel in terms of a pan-European banking union.

With respect to the ESM, the German Finance Ministry did note that no number has yet to be agreed upon for the leverage that will be employed, so essentially it is hapless to speculate on the size of the ESM. That's that, for now.

With respect to the disagreement between French and German leaders, Chancellor Merkel refuted President Hollande's quip that the banking union should be completed on a timetable of "the earlier, the better." With the ECB buying politicians time, it is off little surprise that the urgency behind implementing the necessary safeguards has died down a bit. But Chancellor Merkel is making sure leaders get this round of measures right even as financial markets "are watching Europe [and] want to see results," saying that "[the banking union] has to be thorough, the quality has to be good and then we'll see how long it takes," she said.

Taking a look at credit, peripheral European bond yields are mixed amid the Euro's weakness. The Italian 2-year note yield has increased to 2.231% (+11.7-bps) while the Spanish 2-year note yield has decreased to 2.973% (-2.7-bps). Likewise, the Italian 10-year note yield has increased to 5.080% (+5.2-bps) while the Spanish 10-year note yield has decreased to 5.716% (+5.1-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:52 GMT

JPY: +0.15%

GBP:-0.08%

CHF:-0.41%

CAD:-0.47%

EUR:-0.53%

AUD:-0.58%

NZD: -0.93%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.19% (+0.40% past 5-days)

ECONOMIC CALENDAR

There are no key data releases on the docket for today, suggesting that prevailing sentiment and technical trends will continue to dictate price action for the next 24-hours.

TECHNICAL OUTLOOK

EURUSD:

BB represents Bollinger Bands ®

Price has traded below soft support at the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 today, breaking to fresh lows unseen in the Fed's QE3 era. The daily RSI has exited overbought territory and is trending lower, though the 4-hour RSI is close to oversold again with some significant diverging (given the relationship between price and RSI the last time the 4-hour RSI was at this level). Interim resistance lies at 1.2930/35, 1.2970/75 (5-EMA), 1.3145, 1.3165/70, and 1.3240. Near-term support comes in at 1.2820/30 (200-DMA, late-April swing high) and 1.2825/30 (20-EMA, 200-DMA).

USDJPY:

The USDJPY continues to move lower off of the pullback at trendline resistance last week, spurred on by a general feeling of disappointment on the BoJ's newest stimulus measures has created the ideal sell-off situation. Now that price is below 78.10/20, 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low). A close above 78.10/20 leaves open the possibility for a rebound to 78.60 and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs).

GBPUSD:

The pair has pulled back to the key 5-EMA at 1.6210 (for an indication of short-term strength) and as noted last Thursday, "the gap between the 5-EMA and the 20-DMA has started to turn lower, suggesting a compression of price is occurring. If the 5-EMA holds, we're looking for further rallies; if not, support is close by." This has proven to be the case the past few days, though a break of the 5-EMA is threatening today. The key 1.6120/40 level, broken on Friday, remains our guide for bullish/bearish price action. As long as the GBPUSD closes above said level this week, the door is open for a move towards 1.6400 by the end of the month. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.6120/40 support comes in at 1.6030/35 (20-DMA), 1.5970 (ascending trendline off of August 2 and August 31 lows, former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows).

AUDUSD:

The pair remains range bound the past several days, trading in a 120-pip range the past three-days. The descending trendline off of the August 9 and August 23 highs has kept the pair supported the past four-days, and it remains that the 20-EMA overlapping at 1.0420/25, a base could be building for the next move higher. As long as this level holds today - despite the intraday spike lower - we continue to look higher. Near-term resistance comes in at 1.0410/25 (descending trendline off of the August 9 and August 23 highs, 20-DMA, mid-August swing lows), 1.0480/85, 1.0550/60, and 1.0615/30 (August high). Support comes in at 1.0365/80 (last week's low, 50-EMA) 1.0325 (200-DMA), and 1.0250/70.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Any opinions, news, research, analyses, prices, or other information contained in this email are provided as general market commentary, and do not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The content in this email is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. Dailyfx has taken reasonable measures to ensure the accuracy of the information, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the content, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this email. Please read the full disclosures here. Additionally, Dailyfx takes your privacy seriously. Please click here to read our privacy policy.

Valuable Resources