Euro Back Under Pressure

The Euro has come back under some intense pressure over the past few sessions with the market reacting in “sell the fact” fashion following the latest ECB rate decision and Mr. Trichet’s signaling of imminent rate hikes after using the “strong vigilance” language. Also seen weighing on the single currency have been a number of developments which include; news of a worse than forecast Greek GDP, concerns from Moody’s over a Greek default, and indications from the ECB that they are not planning to roll over their holdings of Greek debt.

While some of the other currencies have held up relatively well, we believe that most currencies will be more exposed against the US Dollar going forward as the risk off/global slowdown themes continue to materialize. The latest rate hike from the Bank of Korea lends more reason for concern, while market participants continue to anticipate another round of tightening from China. One of the currencies that we feel could be most vulnerable is the New Zealand Dollar which trades by multi-year highs on some more encouraging local fundamentals, but would seemingly be at risk of coming off significantly should global risk appetite continue to wane. RBNZ Bollard has even clearly stated that the local currency is overvalued and we would expect to see any additional gains from here as limited.

Looking ahead to the European session, Eurozone and UK inflation data and UK industrial production are the main releases and could very well inspire some additional volatility in the markets. Canada employment data, US import prices and the US monthly budget statement are the standouts in North American trade. US equity futures and commodities prices are back to showing offered following mild recoveries on Thursday.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Rallies have stalled out just ahead of the 78.6% fib retracement off of the major 1.4940-1.3970 move, and the market could finally be in the process of carving out a fresh lower top by 1.4700 ahead of the next major downside extension back towards the 1.3970 recent trend lows. From here, look for a daily close below 1.4400 to confirm bias and accelerate declines, while only back above 1.4700 delays and gives reason for concern. Look for intraday rallies to be well capped ahead of 1.4650.

USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support in the 80.00 area and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported around 80.00 with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks and a break and close back above 81.00 will help to confirm.

GBP/USD: Rallies have been very well capped in the 1.6500’s with the market looking like it wants to carve out a fresh lower top by 1.6550 ahead of the next downside extension below 1.6060. A daily close back below 1.6285 will reaffirm outlook and accelerate declines, while only back above 1.6550 negates and gives reason for pause.

USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of a drop to yet another record low below 0.8400. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Look for a break and close back above 0.8450 to encourage bullish reversal prospects, while only a drop below 0.8300 delays.

Written by Joel Kruger, Technical Currency Strategist