FX - US Dollar Selling on Thursday Classified as Corrective Price Action

• Markets locked in quiet consolidation
• US Dollar intraday pullbacks are corrective
• Italian bond spreads remain in focus
• UK Nationwide consumer confidence softer
• UK retail sales due up at 9:30GMT

There have been very few developments over the past several hours and since the New York close, with market mostly locked in some quiet trade. The US Dollar remains very well bid, and the minor Greenback selling on the day thus far should not be interpreted as anything more than short-term profit taking and a temporary consolidation. We continue to recommend keeping a close watch on the ever widening Eurozone bond yields, with Italian yields considering an assault on an alarming 8%. This would most definitely result in some form of official response in an effort to mitigate any resulting damage to the banking system.

Elsewhere, the economic calendar has been equally light on Thursday, with the only key releases thus far coming from a softer UK Nationwide consumer confidence, and higher Aussie average weekly wages. Looking ahead, UK retail sales will headline the European session, while in North America things pick up with building and housing permits, initial jobless claims and the Philly Fed. On the official circuit, EU Barnier, France’s Sarkozy, Germany’s Merkel, Fed Pianalto, Fed Dudley, EU Barroso and EU Almunia are all slated to speak. US equity futures are tracking moderately higher, while commodities are mixed with oil lower and gold mildly bid.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The latest break below 1.3480 should now open a fresh downside extension which ultimately exposes a retest of the key lows from October at 1.3145. Look for any rallies to be well capped below 1.3700, while ultimately, only back above 1.3870 would negate outlook. Once 1.3145 is taken out, it will negate the corrective October price action and should result in a more aggressive bout of selling into the 1.2000’s. We continue to project weakness over the coming weeks into the lower 1.2000’s as per the monthly chart.

USD/JPY:Although the market has come back under pressure following the recent surge to 79.55, we retain a constructive outlook with the price still holding above the daily Ichimoku cloud. The bottom of the cloud currently comes in just under 77.00 and so long as the market holds above the bottom of the cloud on a daily close basis, we continue to recommend looking to be long this market in anticipation of a more significant bullish trend shift from record lows. A close back below 76.80 would however give reason for concern.

GBP/USD: The latest daily close below 1.5870 confirms our bearish outlook and should now open the door for a bearish resumption back towards the key October lows at 1.5270 over the coming days. Next key support comes in at 1.5630, while any intraday rallies are expected to be very well capped below 1.6000.

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. The latest rally seems to be gaining momentum, and we anticipate that the market will soon clear the key October highs at 0.9315. Above 0.9315 should then accelerate gains and open the next major upside extension towards parity. Any setbacks from here should be very well supported above 0.8900.

--- Written by Joel Kruger, Technical Currency Strategist

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