| By Christopher Vecchio, DailyFX Currency Analyst
The European Central Bank's dud of a policy meeting yesterday gave way to a massive sell-off in Euro-based pairs, as it became increasingly clear that German opposition to a full-fledged debt monetization program would keep the most important player in the Euro-zone sovereign debt crisis on the sidelines. Thus, as we backtrack President Mario Draghi's statements, we essentially just rewind one week (the EURUSD traded back to its 'pre-Draghi speech in London' level yesterday), but for one glaring difference: borrowing costs in Italy and Spain are significantly lower, especially on the shorter-end of the yield curve, and little progress if any has been made.
The EURUSD has rebounded soundly, which was not totally unexpected: after big moves in one direction, the following sessions are likely to offer a rebound if not a consolidation. Accordingly, or perhaps rather, 'the catalyst,' has been the performance of peripheral European sovereign debt. The Italian 2-year note yield has fallen to 3.135% (-57.2-bps) while the Spanish 2-year note yield has plunged to 4.035% (-64.4-bps). Similarly, the Italian 10-year note yield has slid to 6.091% (-19.2-bps) while the Spanish 10-year note yield has dropped to 7.002% (-7.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:25 GMT NZD: +0.59%
CAD:+0.56%
EUR: +0.55%
CHF:+0.54%
AUD:+0.48%
GBP: +0.37%
JPY: -0.09%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.31%(+0.16 past 5-days) ECONOMIC CALENDAR The docket is thick to end the week, with all of the key events (and the rest of the data for the week) coming out of the United States. At 08:30 EDT / 12:30 GMT, the USD Nonfarm Payrolls report for July will be released, and a modest improvement is expected. At an expected print of +100K, the USD Unemployment Rate, released at the same time, is unlikely to budge. At 10:00 EDT / 14:00 GMT, the USD ISM Non-manufacturing Composite for July will be released, and it is expected to show modest growth, albeit at a slightly slower pace than what was experienced in June (52.0 expected from 52.1).
TECHNICAL OUTLOOK
The EURUSD broke the streak of lower highs and lower lows yesterday, with a higher high and a lower low, in what finished as a massive Inverted Hammer. Nonetheless, the reversal today did not take hold, and the pair has retraced nearly 61.8% of its move off the high to the low, just short of 1.2300. A level noted almost daily in this column, the 1.2155/70 zone, held as support, as it did in mid-July. Perhaps an Inverse Head & Shoulders is forming; it's too early to make that decision, especially with the USD Nonfarm Payrolls report due today. Nevertheless, as the pair continues to trade with an RSI below 50 on the daily charts, we believe selling rallies going forward is the preferred course of action. Near-term resistance comes in at 1.2310/30, 1.2385/90 (July high), and 1.2405 (August high). Support comes in at 1.2220/45 (20-DMA), 1.2155/70, and 1.2110/20. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming five-weeks, we are looking for a sell-off into 1.1695-1.1875. USDJPY:
 Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? As long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (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. As noted yesterday, "if the Bank of England adds more liquidity to the market and the European Central Bank disappoints, the pair will easily break trendline support at 1.5500." Indeed, on the back of a disappointing performance by the latter, the GBPUSD traded below 1.5500 for a brief period, before rebounding back towards 1.5600 today. The slight ascending channel off of the July 12 and July 25 lows held as support on the initial test, also noted yesterday. For now, 1.5590/95 (10-DMA) is near-term resistance, as is 1.5625/40. Looking lower, support is 1.5570/80 (20-DMA, 50-DMA). AUDUSD:  The AUDUSD continues to push its ascending channel trendline, moving as high as 1.0580 before putting in new lows at 1.0435. in trade yesterday though is currently sitting slightly off its highs at 1.0511. The 4-hour RSI found support 50, suggesting that the uptrend is very much still intact; any further declines will need a fundamental catalyst. Near-term resistance comes in at 1.0535/45 (July highs) and 1.0580. Support comes in at 1.0480, 1.0435/45, and 1.0380/85. --- Written by Christopher Vecchio, DailyFX Currency Analyst
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