FX - Short-Term Technicals Warn of Euro Bounce Over Coming Days

• Technical studies warning of a potential bounce in the Euro
• Fundamentals however suggest that any rallies will be limited
• IMF lowers global growth forecasts; expresses concern over Greece
• Aussie retail sales come in weaker than expected

Although fundamentals continue to be Euro negative, we would not rule out the potential for a short-term corrective rally in the Euro over the coming sessions. Technically, daily studies are now oversold, and the risks from here are for some form of a bounce before underlying trend resumption. There are some buy-stops reported in EUR/USD above 1.2815, and we would look for a daily close above this level to open the door for a move back towards the 1.3000-1.3200 area over the coming days. Ultimately however, we do remain Euro bearish and target deeper setbacks in this market towards 1.2000 over the coming months.

Fundamentally, there has been very little in the way of developments to inspire any confidence in the region, and with the LTRO operation failing to convince investors that European banking issues are resolved, and European bond spreads continuing to widen, it seems as though any inhibitions from longer-term investors over establishing meaningful Euro short positions are being set aside. More recently, the IMF has downgraded global growth forecasts and has expressed serious concern over the ability for Greece to recover.

For the week ahead, the key focus will be on European bond auction results, official comments from central bankers and government personnel, rating agency actions, and US economic data, highlighted by US retail sales. On the strategy front, we continue to keep a close eye on some beaten down Euro cross rates which also could be at risk for bullish reversals. These cross rates include EUR/JPY and EUR/AUD. The Australian Dollar has been an underperformer in early Monday trade on the back of some softer than expected retail sales data.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: After finally taking out the 2011 lows from January by 1.2870, the market seems poised for the next major downside extension. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped ahead of 1.3200.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

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 1.5360 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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