Euro H&S Top Could be in the Works; Close Below 1.3570 Confirms

Rallies in the Euro have stalled out as we had anticipated above 1.3700 with the market once again looking to roll back over in favor of a more meaningful decline. Last week, we wrote in our commentary that we wouldn’t have been surprised to see initial Euro declines stall out on a close basis above 1.3570 in favor of a potential head & shoulders topping formation. Sure enough, the market failed to close below 1.3570 last week and rallied back above 1.3700 in what now looks to be an attempt to carve the right shoulder of the H&S top. From here, we see any additional rallies well capped by 1.3800 ahead of a fresh downside extension back below 1.3505 and towards the 1.3200 area further down.

We believe that any future weakness in the Euro, will ultimately translate into broader currency weakness and we also contend that this will result in some relative underperformance in the commodity bloc. Earlier in the week the Canadian Dollar started to weaken, and the Australian and New Zealand Dollars are also really starting to show signs of vulnerability at current levels. A combination of softer economic data out of Australia, softer economic data out of China and tighter monetary policy from the PBOC should all continue to weigh on the antipodean going forward.

While the latest employment data out of Australia was on the surface relatively in line with forecasts, the 8k decline in full-time jobs is nothing to smile about and we believe is a red flag for an impending slowdown in the Australian economy. Regrettably, we exited our short AUD/USD from 1.0100 on Wednesday just above cost, and will have to wait for another opportunity get involved. We are however still short the Australian Dollar though the Euro and have greatly benefited from that exposure in recent sessions.

Wednesday’s Bernanke reiteration of higher unemployment and lower inflation did not help the Dollar, but at the end of the day, nothing new was really said, and any selling of the Greenback on the back of the Fed Chair’s remarks, was easily offset by broader market flows. Comments later in the day from Fed Lockhart also helped to generate some fresh bids in the buck after the Fed official said that QE3 was not needed.

Looking ahead, the key event risk for the day comes in the form of the Bank of England rate decision out at 12:00GMT. No change is expected on either the rates or asset purchase target, although we could see some volatility on any accompanying headlines that provide additional insights into the direction of policy going forward. In our opinion, the risks are tilted to the downside for Sterling, with the growing expectation for the start of a tightening cycle perhaps too aggressive. While economic data has certainly been improving, and inflation is elevated, we believe there is still a critical need for ultra accommodative policy (just like in the US).

On the data front, Swiss SECO consumer confidence (10 expected) is out at 6:45GMT, followed by Swiss inflation data (-0.2% expected) at 8:15GMT. At 9:00GMT, the ECB publishes its monthly report, while UK industrial production (0.5% expected) and manufacturing production (0.4% expected) then follow at 9:30GMT. In North America, Canada house prices (0.2% expected) are out at 13:30GMT, along with US initial jobless claims (410k expected) and continuing claims (3900k expected). US wholesale inventories (0.8% expected) are then out at 15:00GMT, with the monthly budget statement (-$60B expected) capping things off later in the day at 19:00GMT. On the official circuit, Fed Lockhart is back on the wires on the topic of fiscal policy at 17:45GMT.

TECHNICAL OUTLOOK

EUR/USD:The latest rallies have stalled out well ahead of 1.3860 with the market finding some resistance by an ideal right shoulder top in the mid-1.3700’s ahead of the latest minor setbacks. From here, the risks are tilted to the downside, with a break and close back below 1.3570 to like trigger the H&S topping formation and open a fresh downside extension towards the 1.3200 area over the coming days. Any rallies should continue to be well capped ahead of 1.3800 with only a break back above the figure to give reason for concern.

USD/JPY: Despite the latest setbacks below 82.00 which had put the pressure back on the downside, the market remains well bid on dips. Last Friday’s price action was highly constructive and significant, with the market putting in an intense bullish outside day which consumed the previous 4 daily ranges. From here, we look for continued upside back towards 83.70 over the coming sessions, with a break above to accelerate towards more critical resistance at 84.50. Any setbacks should be well supported ahead of 81.50 with only a daily close back below 81.00 to negate.

GBP/USD: The market looks to have once again found a meaningful top by the 1.6300 barrier, with the latest setbacks resulting in a series of daily lower tops. From here we look for a break and close back below 1.6025 to confirm bias and accelerate declines back towards 1.5800 over the coming sessions. A daily close back above 1.6200 would give reason for concern, while ultimately only back above 1.6300 negates.

USD/CHF: Although the longer-term market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Lat Friday’s daily close above 0.9540 confirms and should help to accelerate gains towards 0.9785. Any intraday setbacks should now be well supported ahead of 0.9450.

2:15 AM | 0 comments | Read More

FOREX TREND MONITOR: Rates Outlook in Focus, Aussie Tracking Gold

Major Currencies vs. US Dollar (% change)

10 Jan 2011 – 14 Jan 2011

EURUSD: All Eyes on EZ FinMin Summit for Debt Crisis Relief

Relative borrowing costs came into focus for the Euro after last week’s unexpectedly hawkish ECB policy announcement pushed up front-end yields, sending the currency higher. The subtle change in rhetoric seems likely to have been an attempt to talk down inflation expectations after yearly CPI growth printed at 2.2 percent, topping the central bank’s target 2 percent for the first time since November 2008, with an actual rate hike highly improbable while funding troubles persist on the Euro Zone periphery. This puts the spotlight on Monday’s meeting of Euro Zone finance ministers in Brussels, with traders keen to see if policymakers are able to reach consensus a “comprehensive solution” to the debt crisis. On balance, a disappointing outcome looks likely, with German officials hinting they want to push out a final settlement until March. Should this materialize, last week’s gains may prove to evaporate as quickly as they appeared. German ZEW and IFO surveys of investor and business confidence headline the economic calendar.

Source: Bloomberg

GBPUSD: Inflation, Jobless Claims Data Eyed for BoE Bias Clues

Monetary policy expectations remain in focus for the British Pound as GBPUSD continues to track closely with the UK - US Treasury yield spread. The economic calendar promises to underscore the paralyzed state of the central bank with Consumer Price Index figures expected to show the highest inflation rate in seven months while December’s Jobless Claims print flat having declined only modestly over the previous two months, highlighting the slowdown in the labor market’s recovery through the second half of last year. The conflict between containing price growth and backstopping the recovery amid the onset of the government’s austerity program is unlikely to get any closer to a concrete resolution at least until minutes from the last Bank of England policy meeting are published next week. This suggests that Sterling may find its near-term catalyst in the Euro Zone debt crisis if a disappointing outcome to Monday’s summit of the regional bloc’s finance ministers fails to produce results, driving capital out of the single currency and into the UK unit as an alternative medium of exchange. December’s Retail Sales report rounds out scheduled event risk.

Source: Bloomberg

USDJPY: Hu Jintao’s US Visit, Corporate Earnings Season in Focus

US Treasury yields remain most prominent in driving Japanese Yen price action, but a relatively light US economic calendar means prices will look to Chinese President Hu Jintao’s visit to the US as well as the start of the corporate earnings season for clues on where things go from here. It is widely known that China is America’s largest foreign creditor, so the outcome of President Hu’s meetings with US President Barack Obama may have significant implications for bond yields, at least in the near term. Meanwhile thirty-eight S&P 500 companies are set to report fourth-quarter earnings throughout the week, giving investors an alternative gauge on the pace of the US recovery following the notable pickup in key economic data over recent weeks. November’s Tertiary Index of service demand stands out on the domestic data docket.

Source: Bloomberg

USDCAD: Rhetoric Tone Key as Bank of Canada Announces Policy

With the correlation between USDCAD and the 2-year yield spread at the highest in over a year, all eyes are pointed squarely at the Bank of Canada as Governor Mark Carney and company deliver their monthly monetary policy announcement. Although the central bank is widely expected to keep benchmark borrowing costs unchanged at 1 percent, priced-in rate hike expectations for the year ahead are the most robust among the majors and traders will be looking for confirmation of a hawkish bias in the tone of the statement accompanying the rate decision to guide price action. Leading Indicators and Retail Sales figures round out the economic calendar.

Source: Bloomberg

AUDUSD: Gold Correlation Hints Aussie Dollar Weakness Ahead

The Australian Dollar’s strongest noticeable relationship at present is its correlation to gold prices, with both the currency and the yellow metal likely to decline in the week ahead as investors’ dominant forecast for the evolution of the global post-Great Recession recovery shift away bullish and bearish extremes. Gold had decoupled from the risk-on/risk-off dichotomy of recent years, reflecting its appeal as a store of value for bulls and bears alike as the former camp called for catastrophic inflation on the back of ultra-loose monetary policies while the latter projected renewed collapse across asset classes as fiscal stimulus expired. However, investment demand suffered a major setback last week, with gold ETF holdings snapping a rising trend carved out through the fourth quarter to drop to the lowest since mid-September. The reversal follows the recent improvement in US economic data – the bellwether for the global recovery at large – coupled with rising sovereign stress in Europe and looming slowdown in China, which havesimultaneously made a back-slide into recession seem unlikely while pointing to a rebound that amounts to a long, hard slog over the years ahead. Interestingly, a shift of consensus toward this kind of recovery bodes ill for the Aussie much the same as it does for gold, hinting other central banks will now get their chance to catch up as the RBA – until recently the leader in post-crisis monetary tightening – sits on its hands.

Source: Bloomberg

NZDUSD: Spotlight on Rate Hike Forecast as Inflation Soars in Q4

The rising link between NZDUSD and yield spreads puts the spotlight squarely on the outlook for monetary tightening ahead of next week’s RBNZ policy meeting. Wednesday’s release of fourth-quarter Consumer Price Indexfigureswill shape expectations, with economists calling for the annual inflation rate to jump to 4.1 percent, the highest in over two years. November’s Retail Sales report is also on tap.

5:47 AM | 0 comments | Read More

EUR/USD Classical: Euro Eyes Key Support by 1.2970

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. The latest topside failure above 1.3400 and subsequent sharp pullback strengthen our bias and a retest of next key short-term support by 1.3055 which guards against 1.2970 is expected over the near-term. From here, any intraday rallies should be well capped ahead of 1.3300.

5:50 AM | 0 comments | Read More

FX Headlines: Euro Extends Selloff Amid Dismal Retail Sales, Consumer Confidence Reports



Fundamental Headlines

• Global Food Prices Hit Record High – Wall Street Journal

• U.S. Jobs Help Asia Sentiment – Wall Street Journal

• Jobs Growth Bolsters Recovery Confidence – Financial Times

• German Factory Orders Surged in November on Export Demand – Bloomberg

• U.K.’s Osborne Calls on EU to Bolster Banks to Aid Recovery – Bloomberg

EURUSD: Euro-Zone economic confidence in December rose to 106.2 from a revised 105.1 the month prior, marking a 38-month high while industrial confidence inched high to post the highest reading since August 2007. Meanwhile, consumer confidence slipped from -9.4 to -11, falling for the first time in approximately 7 months. In all, confidence in the 17 member euro area gained on the back of business sentiment; however, the region has not achieved a self sustaining growth. Thus, euro bulls should caution the upcoming weeks as tough austerity measures remain in the spotlight and are expected to weigh on growth. Not to overlook, Euro-Zone retail sales were also released during the European trade. Figures unexpectedly dropped 0.8 percent, while the annualized rate slowed to 0.1 percent. The reading does not bode well in that thereafter the impact of the Christmas holiday, retail sales will likely push lower in light of higher value added tax measures and other forms of tightening by governments in the bloc. All in all, increased headwinds remain for the single currency. Taking a look at the currency markets, the EURUSD has extended yesterday’s losses and now looks poised to head lower as technical developments point to additional losses in the pair. The parabolic flipped to the downside, calling for additional losses, while our user defined slow stochastic indicator reversed course earlier this week.

5:50 AM | 0 comments | Read More

Forex: British Pound To Maintain Downward Trend, Euro Eyes 200-Day SMA

Talking Points

• British Pound: Services Unexpectedly Contract
• Euro: Retail Spending Contracts
• Canadian Dollar: Ivey PMI on Tap
• U.S. Dollar: Risk Sentiment To Drive Price Action On Light Calendar

The British Pound fell back from a high of 1.5563 as the economic docket reinforced a weakened outlook for future growth, and the exchange rate may push lower going into the end of the week as it maintains the downward trend from the November high (1.6298). A survey by the Bank of England showed demands for home loans fell “markedly” in the four quarter, with the gauge slipping to -41.5 from -6.1 during the three-months through September, while credit availability for firms in the U.K. was “broadly unchanged” from the third quarter. Moreover, a separate report showed service-based activity in Britain contracted for the first time since April 2009, with the PMI falling back to 49.7 from 53.0 in November, and the central bank is likely to maintain its current policy throughout the first quarter of 2011 as it aims to balance the risks for the region.

According to Credit Suisse overnight index swaps, investors are pricing at least one 25bp rate hike for 2011 as the BoE expects inflation to hold above the 2% target, but the central bank may continue to talk down the risks for inflation as it expects the tough austerity measures to bear down on the economic recovery. In turn, we may see a growing split within the MPC as the fundamental outlook remains clouded with uncertainties, and the opposing views held by the committee could translate into British Pound weakness as investors speculate the BoE to expand monetary policy further over the coming months. As a result, the GBP/USD is likely to maintain the downward trend over the near-term, and the exchange rate may fall back towards the September low (1.5296) as it searches for support.

The Euro slipped to a low of 1.3083 on Thursday following a mixed batch of data, and the single-currency may face increased headwinds over the coming days as European policy makers struggle to prop up investor sentiment. Economic confidence in the Euro-Zone improved for the seventh consecutive month in December, with the index advancing to 106.2 from 105.1 in the previous month, while retail spending unexpectedly fell 0.8% in November after holding flat in the month prior. As policy makers expect to see an “uneven” recovery materialize this year, the European Central Bank is likely to support the economy throughout the first-half of the year, but the mounting risk for contagion could lead the Governing Council to delay its exit strategy further as the governments operating under the fixed-exchange rate system struggle to balance the budget deficit. However, as the EUR/USD holds above the 200-Day moving average at 1.3079, the exchange rate may hold steady as equity futures foreshadow a higher open for the U.S. market, and a rebound in market sentiment could lead the euro-dollar to pare the overnight decline as risk trends continue to dictate price action in the currency market.

U.S. dollar price action was mixed during the overnight trade, with the USD/JPY bouncing back from a low of 82.87, and risk sentiment is likely to dictate price action going into the North American session as the economic docket remains fairly light for Thursday. Nevertheless, the Canadian dollar remains at risk for a short-term reversal as market participants expect business spending in the region to expand at a slower pace in December, and a dismal Ivey PMI could lead the USD/CAD to retrace the sharp decline from the holiday trade as the Bank of Canada curbs its outlook for future growth.

Will the EUR/USD retrace the advance from September? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 01.03.11

To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

FX Upcoming

Currency	GMT	EST	Release		Expected	Prior
USD	13:30	08:30	Continuing Claims (DED 25)		4090K	4128K
USD	13:30	08:30	Initial Jobless Claims (JAN 1)		404K	388K
CAD	15:00	10:00	Ivey PMI (DEC)		54.0	57.5

Currency	GMT	Release	Expected	Actual	Comments
AUD	22:30	AiG Performance of Services Index (DEC)	--	46.4	Moves modestly off lows from Nov.
AUD	00:30	Building Approvals (MoM) (NOV)	-4.0%	-4.2%	8th contraction in 2010
AUD	00:30	Building Approvals (YoY) (NOV)	-9.8%	-9.9%	2nd contraction in 2010
JPY	02:00	Tokyo Average Office Vacancies (DEC)	--	8.91%	Slips back from 3 month high in Nov.
CHF	08:00	CPI (MoM) (DEC)	-0.1%	0.0%	Outcome remains tame but moving in the right direction
CHF	08:00	CPI (YoY) (DEC)	0.4%	0.5%
GBP	09:30	PMI Services (DEC)	52.8	49.7	Worst reading since April 2009
GBP	09:30	Official Reserves ( Changes) (DEC)	--	$976M	Rebounds from sharp contraction in Nov.
EUR	10:00	Euro-zone Consumer Confidence (DEC F)	-10.2	-11.0	Pretty strong readings across the board, some have smashed expectations
EUR	10:00	Euro-zone Economic Confidence (DEC)	105.8	106.2
EUR	10:00	Euro-zone Industrial Confidence (DEC)	2.0	4.0
EUR	10:00	Euro-zone Business Climate Indicator (DEC)	1.00	1.31
EUR	10:00	Euro-zone Service Confidence (DEC)	10.1	9.8
EUR	10:00	Euro-zone Retail Sales (MoM) (NOV)	0.2%	-0.8%	Weakness is in line with recent trends.
EUR	10:00	Euro-zone Retail Sales (Yoy) (NOV)	2.1%	0.1%
EUR	11:00	German Factory Orders (MoM) (NOV)	1.0%	5.2%	Fastest expansion since Jan. 2010
EUR	11:00	German Factory Orders (YoY) (NOV)	15.9%	20.6%	Best since June 2010.

5:49 AM | 0 comments | Read More