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. The biggest beneficiaries have unsurprisingly been the Swiss Franc, Yen and US Dollar, while the Euro has been hit the hardest. Despite their exposure on the higher yield end of things, the commodity bloc has help up relatively well on a surge in demand for gold and oil resulting from this latest crisis.

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.

Looking ahead, the economic calendar is exceptionally light in Europe, with the only notable release coming out of Germany in the form of retail sales (2.0% expected) due at 7:00GMT. 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 commodities are consolidating their latest moves. A nasty bearish reversal day in US equities on Friday could however warn of deeper setbacks ahead.

TECHNICAL OUTLOOK

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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.

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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.

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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.

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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.

Written by Joel Kruger, Technical Currency Strategist

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