Euro rebounded in broad based manner last week even though EU finance ministers failed to deliver anything concrete to resolve the current sovereign debt crisis for the long term. Nevertheless, markets were obviously buying into the idea that there will be a resolution to the problems eventually, with modest pain. Recent successful bond sales from peripheral countries did buy the Eurozone much time even though the agreement of the long term plan not be delivered until March. On the other hand, strong data from German also reminded investors that some stronger Eurozone countries were indeed benefited from weakness in the Euro. The break of 1.35 level in EUR/USD carried some technical significant and Euro's rebound would likely continue for at least a test on 1.4 psychological level.

Swiss Franc was notably lower against Euro and Sterling recently as the worry on sovereign debt crisis eased. Meanwhile, recent rhetoric from SNB officials suggested that the bank is still worried about the strength in franc. SNB President Hildebrand noted last week that the clear appreciation of the Swiss franc over the last months poses a major burden for parts of our economy. Also, not least because of the franc's gains, the Swiss National Bank expects a notable slowdown in economic growth this year. Nevertheless, as Hildebrand pointed out the danger of deflation has largely vanished, and hence, risk of imminent intervention isn't large. Also, note that both EUR/CHF and GBP/CHF would likely lose upside momentum on further rise and technically, reversal could be around the corner in both crosses.

Another main theme last week was fear of tightening in China, which triggered sharp selloff in Aussie and Kiwi. China's annual GDP growth accelerated to 9.8% qoy in Q4, far above expectation of 9.3%. CPI slowed more than expected to 4.6% yoy December after reaching a 28-month higher of 5.1% in November. But that was well above some estimates of 4.4% yoy and is still at worrying level. China raised banks' reserve requirement seven times last year but hiked rates twice only. Investors are worrying that more forceful moves lie ahead to cool both growth and inflation. Kiwi was the weakest one as pressured by weak CPI and retail sales data. Canadian dollar, though, managed to rebound towards the end of the weak as helped by solid retail sales data.

Dollar was generally weak against major currencies but the outlook isn't that bad except versus European majors. US longer term treasury yields attempted an upside breakout last week but failed, and thus kept USD/JPY in familiar range. The greenback was clearly strong against Aussie and Kiwi. Outlook in USD/CAD is still bearish but we'd expect further loss of downside momentum on next week and a sizeable rebound should be seen soon.

Technical Highlights

Dollar index dropped sharply to as low as 78.10 last week and seems rebuilding downside momentum. Also, note that EUR/USD's sustained break of 1.35 suggests that more upside should be in the pair to 1.4 psychological level and above. Such development in turn argue that dollar index would possibly break through 77.97 cluster support level. In any case, we'll stay bearish in the index as long as 79.17 resistance holds. Decisive break of 77.97 will indicate that whole rebound from 75.63 has indeed completed at 81.44 already and deeper decline should then be seen to retest this low. 

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Euro's strength was clearly felt across the board last week, in particular against commodity currencies. EUR/AUD's strong break of 55 days EMA, as well as the medium term falling channel suggests that a medium term bottom was at least formed at 1.2925. There is no sign of long term trend reversal yet. But in any case, recent rebound from 1.2925 is expected to continue as long as 1.3346 support holds, targeting 55 weeks EMA (now at 1.4460). 

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Meanwhile XAU/EUR's fall from 1076.13 also accelerated lower last week and took out 1000 psychological level. The selloff in gold against Euro spread to gold on dollar and sent comex gold below 1350 level. But that development provided little support to the greenback. Back to XAU/EUR, note that the bearish divergence condition in daily MACD argues that 1076.13 is likely at least a medium term top. We'd expect XAU/EUR to head further lower ahead through 945.43 support for a test on 886.21. A break above 1029.48 resistance is needed to confirm bottoming or outlook will remain bearish. 

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The Week Ahead

Three central banks will meet this week. FOMC statement would probably be uneventful with minor adjustment in the statement. Fed might acknowledge improvements in the economic outlook, but there is no reason for Fed to end the asset purchase program at this point. BoJ is not expected announce any change to its monetary policy at the first meeting of 2011, same as RBNZ. In addition to that, a number of important economic data will be released this week, including UK and US Q4 GDP.

  • Monday: Australia PPI; Eurozone PMIs
  • Tuesday: Australia CPI; BoJ rate decision; German Gfk consumer sentiment; UK GDP; Canada CPI; US consumer confidence, house price index
  • Wednesday: BoE minutes; US new home sales; FOMC rate decision; RBNZ rate decision
  • Thursday: Japan trade balance; US durables, pending home sales
  • Friday: Japan CPI, unemployment rate, retail sales; Eurozone M3; Swiss KOF; US GDP

EUR/USD Weekly Outlook

EUR/USD's rebound from 1.2873 extended further to as high as 1.3623 last week and the strong break of 1.3496 resistance confirmed that whole fall from 1.4281 has finished at 1.2873 already. Initial bias remains on the upside this week for 1.3785 resistance first. Break will target another high above 1.4281. On the downside, below 1.3502 minor support will turn intraday bias neutral and bring retreat. But downside should be contained by 1.3245 support and bring another rise.

In the bigger picture, main question remains on whether medium term correction from 1.6039 has finished with three waves down to 1.1875. The firm break above 1.35 psychological level again affirm the case that fall from 1.4281 was merely a correction only and whole rise from 1.1875 is still in progress. Also, note that break of 1.4281 will revive the case that medium term correction from 1.6039 was completed with three waves down to 1.1875 and the long term up trend might be resuming. On the downside, though, below 1.2873 will turn focus back to 1.1875 low.

In the long term picture, considering the five wave impulsive structure of the long term up trend from 2000 low of 0.8223 to 2008 high of 1.6039, price actions from 1.6039 are viewed as a correction only. Hence, firstly, we'd expect strong support between 61.8% retracement of 0.8223 to 1.6039 at 1.1209 and 1.1639 to contain downside. Secondly, we'd expect another high above 1.6039 eventually, after correction from 1.6039 is confirmed to be finished. 

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