Beginning of October and 4Q Proves Bullish for Euro, Bearish for Pound

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By Christopher Vecchio, DailyFX Currency Analyst

September 2012 was not your typical September, neither in recent terms nor in historical terms. Whereas September 2011 produced losses of -7.2% for the S&P 500 (the five-year average -0.1%), September 2012 proved more resilient, gaining +2.4% in the index's first winning ninth month since 2010. This sets up for an intriguing October: last October, the S&P 500 gained +10.8%; and in 2010, the last time there was a positive September, the S&P 500 gained +3.7%. If October is truly setting itself up to be a strong month for high beta currencies and risk-correlated assets, it will need to overcome its five-year average of losses of -0.6%.

Whatever influences these seasonal figures may have on FX markets will of course be seen over the next few weeks, but the impact has been less than inspiring today. In what has been a volatile and mixed session, the US Dollar has traded slightly higher overall, but remains in the middle of the pack, as the Euro leads to the upside following some better than expected PMI Manufacturing data for September. On the flipside, after weak British and Chinese PMI Manufacturing data, the Australian Dollar and the British Pound are trailing to the downside.

The coming week is incredibly important for risk trends, with the Reserve Bank of Australia (a referendum on Chinese growth concerns) and the European Central Bank (a referendum on the Euro-zone sovereign debt crisis) set to meet on Tuesday and Thursday, respectively. We believe, as outlined in this week's Top 5 Key Events (to be released at 14:00 EDT / 18:00 GMT today), that the fundamental picture is shaping up to support a bullish move in high beta currencies and risk-correlated assets.

Taking a look at credit, peripheral European bond yields are lower to start the quarter, helping keep the Euro higher. The Italian 2-year note yield has decreased to 2.271% (-2.3-bps) while the Spanish 2-year note yield has decreased to 3.184% (-10.9-bps). Similarly, the Italian 10-year note yield has decreased to 5.054% (-1.6-bps) while the Spanish 10-year note yield has decreased to 5.819% (-5.0-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:58 GMT

EUR: +0.27%

CHF:+0.22%

CAD:+0.04%

NZD:-0.02%

JPY:-0.03%

AUD:-0.14%

GBP: -0.15%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.03% (+0.37% past 5-days)

ECONOMIC CALENDAR

The economic docket isn't exactly stuffed today, though it is saturated with a few important data points that are likely to stoke volatility in USD-based pairs. At 08:58 EDT / 12:58 GMT, the USD Markit US PMI Final (SEP) reading is due, which should show signs of slight growth. At 10:00 EDT / 14:00 GMT, the USD ISM Manufacturing (SEP) report will be released, which is forecasted to show there was no change in manufacturing activity last month. As the USD ISM Price Paid (SEP) report will show, however, prices continue to rise despite the stagnation in growth. Also due after the US cash equity open is the USD Construction Spending (AUG) reading, due to show a rebound but not enough to overcome July's losses. Midway through the US trading session and shortly after the European close, Federal Reserve Chairman Ben Bernanke speaks on monetary policy in Indianapolis, Indiana at 12:30 EDT / 16:30 GMT.

TECHNICAL OUTLOOK

EURUSD:

On a second test, the pair has found support near the 200-DMA, which remains the first major level of downside support. If this level holds, we look towards the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 again, though a subsequent rejection would signal a third test of the mid- to low-1.2800s again. Interim support comes in at 1.2820/55 (20-EMA, 200-DMA, late-April swing high). Resistance lies at 1.2895 (5-EMA), 1.2930/35, 1.3000, 1.3145, and 1.3165/75 (September high).

USDJPY:

With price holding above 77.65/70 by close on Friday, scope for gains into 77.90 and 78.10/20 are well-within reason. A daily close above 77.90 level eyes resistance at 78.10/20, 78.60, 78.85/90 (100-DMA, descending trendline off of the April 20 and June 25 highs), and 79.20/30 (200-DMA, September high). Should price close at or below 77.90, support comes in at 77.65/70 (June 1 low) 77.45/50, and 77.10/15 (September low).

GBPUSD:

The GBPUSD fell into major support earlier today, at 1.6100/20 (20-EMA, descending trendline off of April 2011 and August 2011 highs). Support comes in at 1.6050/65 (ascending trendline off of August 2 and August 31 lows), 1.5970/75 (former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows. Resistance comes in at the former April swing highs at 1.6260 (by close) and 1.6300 (by high), as long as 1.6100/20 holds this week.

AUDUSD:

Further declines today although a sharp rebound off of last week's low as resulted in the beginning stages of a Hammer on the daily chart. Intraday resistance came at topside resistance in the Falling Wedge - a reversal pattern - first noted last week. Although the pattern was initiated, it may have been a false breakout; we will have resolution in the next few days. Resistance comes in at 1.0370 (Falling Wedge breakout level), 1.0405/25 (20-EMA, mid-August swing lows), 1.0470/85 (former intraday swing levels). Support comes in at 1.0325/45 (last week' and daily lows, 200-DMA), 1.0305/15 (ascending trendline off of June 1 and September 6 lows), and 1.0270/80 (former intraday swing levels).

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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