Forex - EURUSD Falls Through 1.3425 Key Support

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Forex News and Events:

The EURUSD continued to tumble as a unnamed source, said that German Chancellor Merkel stated there will be no decision on a bailout package for Greece by the end of the EU's two day summit in Brussels. The EURUSD traded below the 1.3425 key support (low May 2008) down to 1.3406, while the GBPUSD traded down to 1.4957 (at the time of writing). The public rift between Germany and EU officials on the Greek situation seems to be increasing daily, dimming markets optimism and weighting heavily on the EUR. There are growing rumors of short term bets against the EUR ahead of what many feel (including us) will be a disappointing close to Brussels. However, there are still EU officials actively searching for a solution, including the President of the EU Council Von Rompuy who was reported trying to actively arrange a pre-summit meeting on Greece to help pave the way for an aid package to be released in Brussels . And the FT reported on a potential bailout package mechanism for Greece, which IMF had made a substantial contribution. However, we remain highly skeptical of the EU tact and remain bearish on the EUR as long as sovereign risk concerns worries. In Switzerland yesterday, SNB Chairman Hildebrand provided a slightly mixed message. On one hand, he repeated that the SNB would fight excessive CHF appreciation and sounded battle ready when he said that they could buy very large quantities of foreign currency if required. And the other reiterated newly-appointed SNB Board Member Danthine comments, that consumers and corporations must get ready for market determined FX prices and higher rates. After the initial EURCHF knee-jerk reaction higher, the pair depreciated down to 1.4232 record low. A wealth of economic releases and events will keep traders busy today. The Norges Bank will release its policy decision today and expectations are mixed. The official Bloomberg expectations are for a hold, but we are leaning towards a 25bp hike. The central bank is still concerned about price pressures as inflation came in at 3.0% y/y in February (well above close to 2.5% operational target) and housing prices and wages increase have failed to abate. Given the recent pessimism around the NOK, a rate increase should provide reason for a short term rally. In the UK, today's Budget report will capture the markets' attention. While rating agencies have stated that they would wait a few months before reviewing the UK fiscal condition, today's budget should give traders a bias from which to trade the sterling. Ahead of today's release we believe the UK sovereign rate concerns should take a breather, as markets await elections results, CPI figures have backed off to 3.0% yesterday and credit agencies will review the UK conditions in the summer.

width=450Today's Key Issues (time in GMT):

08:00 USD Chicago Fed Evans press conference in Beijing 08:15 SEK NIER economic and confidence surveys. 08:58 EUR Mar PMI composite - flash, 53.8 eyed; 08:58 EUR Mar PMI mfg - flash, 54.0 eyed; 08:58 EUR Mar PMI services - flash, 52.0 eyed; 09:00 EUR GER Mar Ifo sentiment index, 95.8 eyed; 09:00 EUR GER Mar Ifo current conditions index, 91.0 eyed; 09:00 EUR GER Mar Ifo expectations index, 101.0 eyed; 10:00 EUR Mar industrial new orders, +1.9% m/m, 12:30 USD Feb durable goods orders, +1.0% m/m eyed; 12:30 USD Feb - ex-transport, +1.2% m/m eyed; 12:30 GBP UK 10/11 budget announcement. 13:00 NOK Norges Bank policy announcement/13:45 press conference. 13:00 EUR ECB/BoS Ordonez speech in Valencia. 14:00 USD House Ways-Means Committee hearing on China FX policy. 14:00 USD Feb new home sales, 305k AR eyed; 15:00 EUR ECB Stark speech in Dusseldorf. 16:00 CHF SNB ViceChair Jordan speech in Bern. 00:00 USD Fed agency coupon pass, March 12-March 14 maturities

The Risk Today:

EurUsd Further misery for EURUSD today, with the overnight selling pressure in Asia accelerating a move down to the lower end of the range -and significantly causing a breach of the critical support level at 1.3425 that had been intact since 18 May 2009. In our mind this is a profoundly bearish development for the pair, and we are therefore compelled to go short through that level looking for a resumption of the major downtrend. We do however opt to enter only a partial position for the time being, as this dip to 1.3406 lows bounced back above 1.3425 in the very next bar on our hourly chart, and on these breakouts we need to set a relatively roomy stop; just above 1.3490. Ideally, if the breakout is confirmed, we would then wait for a re-test of the back side of 1.3425 to add to shorts, rather than go in with full size on this first signal. Looking at the landscape below, there is somewhat of a gaping void between current levels and next support, really only psychological levels at 1.3300, 1.3200, 1.3100 and 1.3000 before the lower bound of the downtrend channel appears at 1.2950. Rallies should struggle back towards 1.3484 fibonacci level, and above there the major areas of supply at 1.3530 (back side of former support) and 1.3620 (upper edge of downtrend channel).

GbpUsd GBPUSD continues to be dragged lower by a combination of EURUSD weakness and soft economic data, but before we throw the baby out with the bath water it is worth noting that this particular pair has a couple of mitigating circumstances which EURUSD does not. Firstly, the overnight price action has not pushed to new lows yet this month (1.4957 the low so far today; 1.4783 the low from the start of the month). Secondly, the 14-day RSI is still trending upwards to current 40 levels (from 21 levels on 1 March). And thirdly, the absence of a bearish engulfing candlestick on the daily chart implies that in contrast to EURUSD, the bears are still struggling to convincingly gain the upper hand here. The important levels to watch on the downside are this week's current lows at 1.4930, then the 1.4850 (prior range floor) before critical 1.4780 support. Rallies will likely find it heavy going up through 1.5120-30 (coinciding with this week's highs and the upper edge of the downtrend channel vibration); with major resistance still anticipated at 1.5215 and 1.5350 pivot.

UsdJpy We're still at home on the ranges in USDJPY -at least for the time being; once again meandering the well-trodden 89.75 -91.10 zone, however price action in the past 24 hours has been more directional with a clear bias towards the upside. We have already punctured 90.80 once this morning, and after 2 weeks in this range we feel there is limited scope for this pair to avoid confronting a major technical level much longer, and if this momentum holds up then it looks like the 91.10 will be the most likely barrier that the pair takes on. If we do successfully break out to the topside, our sights will then be set on the 200-day moving average now coming in at 91.52, the 92.15 resistance level above, and beyond there the tantalizing prospect of a challenge on the massively important 3 year downtrend at 92.50. Expect bids to start coming in around 90.00, and naturally, the prior supports at 88.75 and 88.15 still remain valid.

UsdChf USDCHF has now broken above the 1.0650 neckline we highlighted earlier in the week, and as such we are now long and looking for a target of 1.0790 to be achieved based on the inverse head and shoulders pattern carved out on the hourly chart. This target coincides with the back side of the former uptrend channel, and is 10 pips shy of the major 1.0800 resistance level. We now expect bids to keep the pair supported around 1.0650, but if we do find this is a false break and we slump back into range, there are ample support levels below at 1.0550 and 1.0500.

Resistance and Support:

EURUSD

GBPUSD

USDJPY

USDCHF

1.3800

1.5615

92.50

1.0900

1.3620

1.5350

92.15

1.0800

1.3530

1.5278

91.52

1.0790

1.3387

1.4977

91.10

1.0672

1.3300

1.4930

89.50

1.0550

1.3300

1.4850

88.75

1.0500

1.3200

1.4780

88.15

1.0480

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

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