All has been relatively quiet since the wild New York session on Friday, with the major markets mostly consolidating ahead of their next moves. The elevated geopolitical risks in the Middle East that have spread from Tunisia into Egypt and throughout the Arab world have been influencing the price action with a clear preference for safe haven currencies. Although, we have seen some stability on Monday, with European traders finding comfort in the fact that things have not escalated further. Price action in EUR/CHF which is traditionally a good gauge for risk appetite has been constructive today, with the market rallying back and eating into Friday's heavy declines.
Relative Performance Versus USD Monday (As of 11:45GMT)
- STERLING +0.25%
Elsewhere, according to a piece in the FT, senior European leaders are in the process of negotiating a grand bargain in an effort to tackle Europe's ongoing debt crisis and overhaul the Eurozone's Eur440B rescue fund in exchange for tougher new austerity measures, and closer surveillance of troubled member states. The negotiations are said to be quite controversial so we don't expect and decisions any time soon. Meanwhile, French FinMin Lagarde has been out with some upbeat and Euro supportive comments after saying that the Eurozone has turned a corner and let's not short Europe and let's not short the Eurozone. German FinMin Schaeuble added to this sentiment after downplaying Eurozone woes and saying that we are ready to defend the Eurozone. Comments from these officials were said to be in response to Barclay's CEO Robert Diamond who said that the crisis in Europe would be more chronic than acute.
The Euro has been well bid on the day thus far and economic data has also been supportive with Eurozone January CPI estimates coming in firmer than expected. Sterling us another relatively well bid currency, with the bounce in risk appetite and hawkish comments from BOE Weale helping to drive the strength. BOE has said that there is a powerful case for a modest rise in interest rates.
Looking ahead, things pick up into North America, with Canada GDP (0.3% expected), industrial product prices (0.6% expected), raw materials prices (3.2% expected) and US personal consumption (0.1% expected) out at 13:30GMT, followed by Chicago PMI (65.0 expected) and Dallas Fed manufacturing (15.0 expected) at 14:45GMT and 15:30GMT respectively. US equity futures and oil prices are consolidating their latest moves, while gold tracks lower on the day. A nasty bearish reversal day in US equities on Friday could warn of deeper setbacks ahead.
EUR/USD: The market has finally stalled out for now by the 61.8% fib retrace off of the major November to January high-low move, with Friday's major reversal day suggesting that deeper setbacks are in the cards. Next key short-term support comes in by previous resistance at 1.3500, but we would need to see a break and close back below this psychological barrier to really encourage the prospect of a legitimate reversal. In the interim, intraday rallies should be well capped ahead of 1.3700, with only a break back above 1.3760 to one again put the focus back on the topside.
USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.
GBP/USD: A major bearish reversal day last Tuesday could now confirm a fresh lower top in place by 1.6060 ahead of the next downside extension. Last Tuesday's break and close back below 1.5840 helps to strengthen bearish bias, and from here, we look for any intraday rallies to be well capped ahead of 1.6000 in favor of a drop towards next support by 1.5750. Only back above 1.6060 negates.
USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400 (see 78.6% fib of record Dec low to Jan high), with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.
Macro account bids in Cable. Middle Eastern demand for Euro. Leveraged names on the offer in the commodity bloc. Still very good two way action in Usd/Jpy. End of month flows suggest could see some whipsaw into the London Fix.
Written by Joel Kruger, Technical Currency Strategist
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