FX - More Consolidation into Friday But Risks Still Tilted to Downside

• Markets still consolidating Wednesday’s declines
• Risks still tilted to the downside
• Eurozone breakup talk far from reality but could strain
• UK inflation data and US Michigan sentiment due Friday
• Various Fed officials also on the wires today

While the US Dollar failed to make fresh headway on Thursday, we were not surprised to see a bit of selling in the buck, with markets needing to pause for some consolidation following a major Wednesday move. However, the overall outlook has not changed in our opinion, and like many officials across the globe, we continue to see the risks tilted to the downside, with plenty of obstacles still needing to be overcome.

Right now these obstacles are in the Eurozone, and although there has been some relief on news that Italy will try and fast-track the austerity vote as early as today, the bottom line is that we are dealing with a region that is exposed to major contagion from severely damaged countries, and a region that is also inching closer and closer to a major liquidity trap. There has been a good deal of talk about a potential severing of ties from the peripheral Eurozone countries and this is also not helping matters. The idea that the core Eurozone countries will be responsible for preventing collapse in the peripherals does not sit well with many, and should continue to be a major issue for the Eurozone.

Looking ahead, UK inflation data and US Michigan sentiment are the key releases on Friday, while on the official circuit, ECB Gonzalez-Paramo, Fed Yellen, fed Evans and Fed Williams are slated to speak. US equity futures and commodities are tracking moderately higher into European trade.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The latest break and close back below 1.3600 confirms our core bearish bias and should now open the door for an acceleration of declines back towards critical support from early October at 1.3145. Daily studies still show plenty of room for weakness and we look for any intraday rallies to now be well capped below 1.3750 on a daily close basis. Ultimately, only back above 1.3870 would delay outlook and give reason for pause.

USD/JPY:Last week’s surge has resulted in an end to a very tight multi-week trade largely confined to the 76.00’s and a likely shift in the overall construct, with the pair carving out a major bottom by 75.50. The price has now broken back above the daily Ichimoku cloud for the first time in several months to confirm a potential shift in the trend, and ability to hold above the cloud reaffirms. Next key topside resistance comes in by 80.25 and a break above this level will likely accelerate gains and expose the 82.00-85.00 area further up. Look for any intraday setbacks to be well supported above 77.50 on a daily close basis, with only a close back below 77.00 to delay. Back above 79.55 accelerates gains.

GBP/USD: After stalling by the 200-Day SMA and a major double bottom objective over 1.6100, scope exists for a resumption of what we believe to be a broader downtrend. Look for a break and daily close back under 1.5875 to confirm and accelerate towards next key support at 1.5650, while ultimately, only a close back above the 200-Day SMA negates. Intraday rallies should be well capped below 1.6000 on a daily close basis.

USD/CHF: The pair looks like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. Look for the latest round of setbacks to be well supported in the 0.8500’s, where a fresh medium-term higher low is sought out ahead of a bullish resumption back towards and eventually through 0.9315. Ultimately, only a weekly close below 0.8500 would concern.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com