FX - Euro Eyes Next Key Support by Yearly Lows from January

• Euro close below 1.3145; exposes 2011 lows
• Fear of European downgrades and Merkel comments weigh
• Fed mildly upgrades outlook for economy
• Italian bond auction in focus for Wednesday trade

Price action on Tuesday was rather significant as the Euro finally managed to break and close below the critical October lows to signal the start to the next major downside extension. Our core bias remains currency bearish/USD bullish and from here we project an acceleration of Euro declines back into the lower 1.2000’s over the coming months. Next key support for the Euro comes in by 1.2870 which represents the yearly low from all the way back in January. With 2011 now marching to a close, after all is said and done, we could be on course to close in the same area where the year began.

The outlook for the Eurozone remains highly uncertain, and fear of a wave of downgrades any day now, coupled with some negative comments from Germany’s Merkel (recently rejected proposal for increase in upper limit of ESM from EUR500B), have not been helping sentiment, and could result in more risk liquidation over the coming sessions. Meanwhile, the Fed has mildly upgraded their outlook for the US economy, and at the same time has not discussed any possibility for additional quantitative easing measures. While market participants might be unhappy with the failure to consider additional accommodation, the development is net net USD bullish and could inspire a narrowing of yield differentials back in favor of the US Dollar.

Looking ahead, UK employment and Eurozone industrial production are the key economic releases in Europe, while market participants will also be very focused on the Italian bond auction results. We would however like to stress that as we head into the final days of trade for the year, markets will likely lighten up dramatically to make for less than ideal trading conditions. While we retain a very bearish currency outlook, we would not rule out the possibility for some short-term reversals back in favor of currencies before we see some renewed selling.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has finally taken out the key October lows at 1.3145 to confirm a lower top by 1.3550 and open the next downside extension towards the 2011 lows from January at 1.2870. Daily studies are however looking a little stretched and at this point we could see some corrective action before the market resumes its downward trajectory. Look for any rallies to be well capped in the 1.3300 area from where the next lower top will be sought out.

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5420 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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