Sterling Recovery Continues, Euro Stumbles as Data Diverges

ASIA/EUROPE FOREX NEWS WRAP

It is midway through trading on Thursday and the British Pound has found itself among the top performers once again – consistently for the past week, mind you – after a batch of better than expected consumption data that has helped further relieve near-term anxiety about the state of the economy.

Yesterday, the Bank of England expressed concerns that a weak Sterling could fuel increased price pressures; and Chancellor of the Exchequer George Osborne left the BoE’s remit unchanged with respect to its +2.0% y/y. These are clear signals that policymakers are disturbed by the Sterling’s quite prevalent weakness in the early part of 2013, paving the way for bullish price action amid implicitly hawkish commentary.

Unlike its neighbor across the English Channel, the Euro just can’t seem to catch a much-needed break. Preliminary March PMI data from France, Germany, and the broader Euro-zone released this morning showed that the region’s worst economic slump since the depths of the 2008-2009 financial crisis is likely to persist in the second half of the year.

Certainly, the data is a direct contradiction to European Central Bank Mario Draghi’s aspiration that growth will rebound “later in the year,” and aligns neatly with my thesis that the economic mess won’t improve just because the ECB hopes it will; there is no reason to bet on a different economic picture when the fiscal and monetary policies guiding the region’s failing economics haven’t shifted.

Taking a look at European credit, peripheral yields have compressed, peripheral yields remain compressed despite the weak PMI data, offering a respite for the Euro. The Italian 2-year note yield has decreased to 1.779% (-3.4-bps) while the Spanish 2-year note yield has decreased to 2.252% (-5.9-bps). Similarly, the Italian 10-year note yield has decreased to 4.563% (-6.2-bps) while the Spanish 10-year note yield has decreased to 4.862% (-8.8-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:50 GMT

NZD: +0.98%

GBP: +0.50%

JPY: +0.43%

CAD:+0.30%

AUD:+0.18%

CHF:0.00%

EUR:-0.12%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.14% (-0.28% past 5-days)

ECONOMIC CALENDAR

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

EURUSD: No change: “I was watching a potential Bullish Falling Wedge scenario last week, but carefully noted that “the breach of the yearly lows…following better than expected US data has increased the likelihood of further losses before a rebound.” The breach was the key for the move lower, with buyers giving a last-gasp effort before capitulating. Key support remains at 1.2860/80, for the same three reasons: the 50.0% Fibonacci retracement on the July 24 low to the February 1 high; the 200-DMA; and the late-November and early-December swing lows. Although there’s been a small bounce today, failure in this area could lead to a ‘waterfall’ sell-off towards 1.2660. Resistance is at 1.2975 (8-EMA) and 1.3070/75 (21-EMA). Support comes in at 1.2860/80 and 1.2660.”

USDJPY: No change: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher. Downside pressure has been prevalent again on Wednesday, though bulls continue to fight the downturn. Price has rebounded firmly above 96.00, and a test of the yearly high near 96.70 could be around the corner.”

GBPUSD: No change, though the Bull Flag first noted yesterday appears to be materializing: “The Bullish Falling Wedge pattern noted last week has thus far played out, but now a Bull Flag may be forming on the daily chart, with the 100% swing extensions coming in at 1.5285, just short of the key 1.5300 former range support from 2010 through early-2013. I maintain that “reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300.” Resistance comes in at 1.5160/75 (21-EMA) and 1.5250/320. Support comes in at 1.5080/85 (8-EMA), and 1.4830/40.”

AUDUSD:No change: “A break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart, adding further evidence for a run back towards the late-January swing highs. Deceivingly strong Australian employment data has provoked the pair to rip into 1.0380, where it has been rejected thus far today, although the mid-February swing highs were tested. Failure could lead to a pullback below 1.0300 before the next drive higher.” It is worth noting that a bullish 8-/21-EMA crossover is in place on the daily chart, so the March low at 1.0110 may have been set.

S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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Sterling Recovery Continues, Euro Stumbles as Data Diverges