FX - Currencies to Consolidate Following Wild Tuesday and Ahead of Fed

• Markets consolidate following volatile session
• Greek referendum still a hot topic and hangs in the balance
• USD should be bought across the board on any dips
• Aussie building approvals much weaker than consensus
• German unemployment and slew of PMIs due out
• Major event risk in the form of the FOMC rate decision
• BOE Jenkins, Germany’s Merkel, and BOC Carney are key speakers for Wednesday

We are not surprised to see markets so quiet on Wednesday following an extremely volatile session of trade in which the US Dollar appreciated significantly across the board. The resurgence in the buck comes from a renewed uncertainty and faded optimism in the markets, with participants less confident in the Eurozone bailout after bond spreads continued to widen in the region and Greece announced a referendum on the bailout plan. Moving forward, we continue to expect to see more USD upside over the medium-term and would therefore be looking for opportunities to buy the buck on any form of an intraday dip. Look for some more consolidation throughout the European session, with volatility not seen picking up again until the US afternoon event risk in the form of the FOMC rate decision.

The focus will be on whether the Fed determines that additional stimulus is warranted, but we contend that they will not make such a determination with economic data starting to show signs of improvement and monetary policy already dangerously accommodative. For now, key economic releases in Europe include German unemployment and manufacturing PMIs, Eurozone manufacturing PMIs, and UK construction PMIs. Earlier today, Australian data was much softer than expected following a very weak building approvals print. On the official circuit, Bank of England Jenkins, Germany’s Merkel, and Bank of Canada’s Carney are all slated to speak. US equity futures and gold prices are marginally bid, while oil remains under pressure.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Last Thursday’s intense rally has now been completely offset and the market finally looks like it has carved out a fresh lower top by 1.4250 ahead of the next major downside extension. From here, we look for a daily close back below 1.3650 to confirm bias and accelerate declines towards critical support at 1.3145. Below 1.3145 will then open the next major drop towards our longer-term objective into the lower 1.2000’s. Any intraday rallies should now be very well capped ahead of 1.4000, while only back above 1.4250 would negate outlook and give reason for pause.

USD/JPY:Monday’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 Monday’s close 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 with only a close back below this level 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 daily close back below 1.5890 to confirm and accelerate towards next key support at 1.5650, while ultimately, only a close back above the 200-Day SMA negates.

USD/CHF: The market has been in the process of a major correction since peaking out at 0.9315 on October 6. However, the overall outlook remains constructive, with the pair looking 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. A daily close back above 0.8900 will confirm bias and accelerate gains.

--- Written by Joel Kruger, Technical Currency Strategist

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