On Tuesday we attempted a short in the Euro by 1.4405, and although the trade has not gone well, our stop at 1.4525 was narrowly averted. While a good deal of the rationale for the trade had been grounded in technical studies which seemed to have been warning of some form of a short-term top and break lower back towards key rising-trend-line support off of the 2011 lows by 1.4250, we were also very attracted to the trade on the fundamental front, with correlated equities and commodities showing some relative weakness and suggesting a shifting to a risk off trade environment. The net result has been unfortunate and somewhat tragic, with equities and commodities indeed following through to the downside, while currencies have failed to confirm with the Euro remaining well bid.
At this point, ahead of the European open, the Euro short is surviving, but will need to see an intraday depreciation back below 1.4450 to get us more comfortable with the prospects for what could be a very nice position. Still, as we had warned in our commentary on the trade from Tuesday, this was a risky position given that the trend in this market has been so intensely bullish for such a long period of time (risking 1.20% of total equity). Goldman Sachs was out recently saying that the US Dollar is 13% undervalued, and we welcome such USD supportive talk, although the comments have hardly been market moving to this point. The key 2010 highs in the Euro come in by 1.4580 and it looks as though the market will look to retest this level should we break back above Tuesday’s high. Ultimately, a break back below 1.4375 will now be required to officially relieve short-term topside pressures.
Looking ahead, there is very little in the way of anything on the economic calendar in Europe that is likely to generate any significant volatility in the Euro, with German wholesale prices and Eurozone industrial production the key releases. However, the same can not be said for the Pound, with UK employment data taking center stage and expected to definitely have a decent impact on intraday price action in the UK currency. Otherwise, the markets are likely to trade off of broader global macro fundamentals and themes. US equity futures are recovering some of the losses from Tuesday, while commodities are also doing the same and track moderately higher.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: The market remains well bid by fresh yearly highs and now eyes a retest of next key resistance which comes in by the 2010 highs at 1.4580. Daily studies are now officially overbought with the RSI above 70, and as such, we would not rule out the possibility for a short-term reversal. However, any setbacks are expected to continue to be very well supported ahead of the critical rising trend-line support off of the 2011 lows in the 1.4300 area. A break below 1.4375 will help to relieve short-term topside pressures, but ultimately, only a break and close back below 1.4300 would officially negate bullish momentum.
USD/JPY: The latest break back above 84.50 is significant and could pave the way for additional gains ahead, although daily studies are currently in the process of unwinding from overbought levels and buying on dips back towards the daily Ichimoku cloud top (82.50) would be the preferred strategy. Next key resistance comes in by the September 2010 highs at 85.90.
GBP/USD: The market appears to be comfortable trading in a loosely defined range between 1.6000 and 1.6400. Any dips below 1.6000 have been very well supported in recent days, while rallies above 1.6400 remain very well offered. For now therefore, the best strategy is to play the range and look to sell on rallies above 1.6400 and buy on dips below 1.6000. Meanwhile, a weekly close above 1.6400 or below 1.6000 will potentially warn of a break of the range. Next key topside resistance comes in by 1.6430 although as per our analysis, we expect the latest push above 1.6400 to once again be well capped over the coming sessions, in favor of yet another bearish reversal towards 1.6000. Tuesday’s daily close back below 1.6300 confirms bias and should accelerate declines.
USD/CHF: The latest break back towards the recently established fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.8950 on a daily close basis, while back above 0.9075 will officially relieve immediate downside pressures and accelerate gains. Only a break and weekly close below the recent record spike lows by 0.8900 ultimately delays outlook.
Source
http://www.dailyfx.com
