FX - Italian Political Turmoil Fails to Have Any Meaningful Impact on Euro

• Markets locked in consolidation; Euro still not going anywhere
• Berlusconi secures austerity but forced to resign
• Australia sees better data but Aussie still offered
• Yen finds renewed bids; Usd/Jpy well supported on dips
• UK trade data is main economic release in European session
• Bank of England kicks off 2-day policy meeting

Price action over the past several sessions has been less than compelling and markets continue to consolidate ahead of their next major moves. The Euro remains confined to a tight range and the key levels to watch above and below over the coming session come in at 1.3870 and 1.3720 respectively. While Italian PM Berlusconi managed to pass austerity measures needed to help stimulate the Eurozone economy, he was unsuccessful in securing enough votes to sustain a majority parliament, resulting in his resignation. Market reaction to these developments have been negligible, and we remain locked in a holding pattern for the time being.

Despite some better than expected data earlier in the day, the Australian Dollar continues to be well offered on any form of a rally, and the higher yielding commodity currencies stand out as one of the weakest performers early Wednesday. We believe that this should reflect the general risk sentiment which remains tilted to the downside and warns of an eventual resumption of broad based gains into the safe-haven US Dollar. Indeed, the Yen has managed to find some renewed bids in recent trade as well, but following a significant round of MOF intervention in the previous week, we suspect that any Yen bids will be easily absorbed ahead of a fresh bout of Yen weakness (ie USD/JPY higher). Look for the current round of setbacks in Usd/Jpy to be well supported in the 77.00’s, with only a daily close back below 77.00 to negate outlook.

Looking ahead, the economic calendar for Wednesday is rather light, with UK trade data standing out as the major release in European trade. Things don’t get any busier in North America, with Canada housing data and US wholesale inventories as the only notable releases. On the official circuit, EU Barnier, Fed Bernanke, and Fed Tarullo are slated to speak. Meanwhile, the Bank of England kicks off its 2-day policy meeting. US equity futures are tracking mildly lower, while commodities are marginally bid.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: 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 1.3605 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 below 1.3900 on a daily close basis, while only back above 1.4250 would negate 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 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 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 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. A daily close back above 0.9000 on Tuesday will confirm bias and accelerate gains.

--- Written by Joel Kruger, Technical Currency Strategist

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