- Greek concerns taking a backseat to Italy
- Italian budget vote in focus on Tuesday
- Italian bond spreads at levels which warn of systemic risk
- Eur/Usd 1.3680 and 1.3605 are key levels to watch
- Aussie underperforms on negative risk and softer data
- German trade and UK industrial production due
Although the problems in Greece are far from resolved at this point, it seems as though market participants have shifted their focus elsewhere, with Italy now in the spotlight. The fear of contagion is becoming a major reality and with Italian bond yields widening to record levels, today’s parliamentary budget vote will be critical. Bond spreads in Italy have now widened out to levels which the UK Telegraph reminds could very well result in margin requirement adjustments, and this in turn would unleash a fresh wave of systemic risk. We therefore continue to project additional weakness in the Euro and other risk correlated currencies going forward and would expect the US Dollar to be the primary beneficiary of these flows. Look for a break in Eur/Usd below 1.3680 on Tuesday to strengthen outlook, while back below 1.3605 will confirm and accelerate declines.
Elsewhere, the Australian Dollar continues to show relative weakness, with the risk off market environment and some more disappointing economic data weighing on the higher yielding currency. Monday’s softer ANZ job ads reading has been followed up on Tuesday with some disheartening trade data. Looking ahead, the European economic calendar features German trade data and UK industrial production, while in North America, the US calendar is very quiet, with the only key release coming in the form of Canada housing starts. US equity futures are tracking marginally lower, while commodities are relatively unmoved.
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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