Sentiment in Europe is deteriorating as the pressure remains on Spanish and Italian bonds. Both the USD and German bunds are outperforming in this type of trading environment while commodities are generally lower. Crude oil is the lone exception as the price is testing the psychological $100 level.
Forex Market Trends
| EUR/USD | GBP/USD | USD/JPY | USD/CHF | AUD/USD | EUR/GBP | |
| Daily Trend |  |
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| Weekly Trend | |
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| Resistance | 1.3860 | 1.6450 | 79.30 | 0.9450 | 1.0750 | 0.8830 |
| 1.3650 | 1.6100 | 77.85 | 0.9330 | 1.0450 | 0.8655 | |
| 1.3480 | 1.5850 | 77.50 | 0.9310 | 1.0340 | 0.8600 | |
| Support | 1.3410 | 1.5715 | 76.80 | 0.9080 | 1.0050 | 0.8485 |
| 1.3250 | 1.5680 | 76.10 | 0.8760 | 0.9925 | 0.8360 | |
| 1.3145 | 1.5270 | 75.63 | 0.8570 | 0.9860 | 0.8285 |
Economic News
USD – US Economy Continues to Show Improvement
Data released yesterday shows the US economy continues to recover. Retail sales numbers climbed by 0.5% on consensus forecasts of 0.3%. Also positive for the US economy, core retail sales climbed by 0.6% in October, above analyst forecasts of 0.5%. The Empire State Manufacturing survey was also stronger and suggests further growth in the sector.
The data piece that sticks out from yesterday’s crowded economic calendar is the larger than expected contraction in producer prices. PPI for the month of October fell by -0.3% m/m. Consensus forecasts were for a decrease of only -0.1%. The drop in inflationary pressures is a concern that Fed Chairman Ben Bernanke has voiced on multiple occasions. This makes today’s headline inflation release all the more important. Should CPI show a decline in the inflation numbers, this may support the Fed’s case of a deflationary threat to the US economy and increase the likelihood of the Fed using more tools to ease US monetary policy (QE3). Another round of QE will most likely weaken the USD versus the majors.
EUR – Signs of Stress in the Markets Due to Europe
There are several indicators that hint at elevated levels of tension in the financial markets. Italian 10-year bond yields are back near the dangerous 7% level. A rumor of an Italian downgrade may be behind the sharp move. Spanish 10-year yields are also well above 6%. In addition, the spread between the German 10-year bund and the French equivalent has skyrocketed to 185 bp. This shows the stress is not only being felt in the bonds of the peripheral nations but also in the core of Europe. Adding to the tension in the European bond market is talk of increased margin requirements for Spanish bonds. Last week an increase in margin requirements for Italian bonds sparked mass liquidation of positions, increasing the selling pressure on the EUR.
Economic woes are also catching up with the euro zone. Data on Monday showed both the French and German economies continue to expand at a moderate pace. However, economic sentiment is moving lower with the German ZEW falling to -55.2, the lowest level for the survey since autumn 2008.
A combination of fiscal problems and a slowing economy are not a good combination for the EUR and further declines in the 17-nation currency may be seen. Near-term support remains at the November 10th low of 1.3480 with a close below this level opening the door back to the October low of 1.3150. Resistance is found off of Monday’s high near 1.3800.
JPY – No Changes Expected from the BoJ
The Bank of Japan concludes their two day policy meeting and no policy change is expected. Given that the BoJ loosened monetary policy at their October meeting by increasing its asset purchase program and the better than expected Q3 GDP numbers the BoJ will likely continue to emphasize its resolve to support the Japanese economy and fight JPY strength.
The JPY continues to rise both against the USD and in the crosses as traders seek out safe havens given the European debt crisis. The most recent COT IMM data shows speculators increased their long JPY positions versus the USD despite the threat of intervention from the Ministry of Finance. Support for the USD/JPY is found at Monday’s low of 76.80 followed by the all-time low at 75.55. Resistance comes in at Monday’s high of 77.50.
Crude Oil – Spot Crude Oil Rises Despite Stronger USD
The price of spot crude oil was higher on the day despite USD gains. The catalyst for the move higher was positive economic data from the US. Both retail sales and the Empire State Manufacturing survey came in well above consensus forecasts. Another driver for the commodity gains may be expectations for additional monetary policy stimulus by the Fed (QE3). Spot crude oil prices have risen almost 33% since putting in a low in October. Perhaps the crude oil market expects an improved US economy?
It is rare to see crude prices rising while the USD is strengthening as there is typically a negative correlation between the two assets. Traders should be eyeing the psychologically important $100 mark. Spot crude oil hasn’t traded at a level this high since July. For additional technical analysis please see the Wild Card section in today’s FOREXYARD Daily Analysis.
Technical News
EUR/USD
The resilience of the EUR has led many traders to adopt the strategy of selling the EUR/USD on rallies. The key resistance level is 1.3860 from the early November consolidation pattern. This is also the 50% retracement from the late October to early November downtrend (1.4246-1.3483). Approaches to this key level and the pair may run into selling pressure. Both monthly and weekly stochastics continue to move lower and initial support may be found at 1.3650, followed by last week’s low of 1.3480. A break here could open the door to 1.3145 from the October low. Additional resistance is located at the 200-day moving average at 1.4105.
GBP/USD
Sterling has been met with selling pressure on approaches to its 200-day moving average which comes in at 1.6140. This moving average comes in just above a bull flag pattern located on the daily chart. The support line of the chart pattern falls from the October 26th low and has a potential measured move of 480 pips which makes the August high at 1.6615 a convenient target. Should the pair fail to break out of the consolidation pattern, support may be located at 1.5850 as well as 1.5680.
USD/JPY
Yen strength has reemerged after a period of little movement. The USD/JPY may find support at its 55-day moving average at 76.95 though the one way movement in the price action hints at additional declines in the pair. Additional support may be located at 76.10 from the bottom of the September consolidation with a final destination at least the all-time low at 75.63. Resistance may be found off of the September high of 77.85 while the long term downtrend from the 2007 high is located at 79.30.
USD/CHF
The USD/CHF made a breach but failed to make a significant move above the 0.9080 resistance from the October 20th high. An additional push higher will likely target the October high of 0.9310. Traders should also have their eye on the 20-month moving average which comes in at 0.9450. Initial support is located near 0.8950 followed by the November low of 0.8760.
The Wild Card
Crude Oil
Spot crude oil prices have risen almost 33% from their October lows, stopping just shy of the key psychological level at $100. Forex traders should note this price has additional significance as it is near the 61% Fibonacci retracement ($99.50) from the move lower stemming from the May high to the October low. Resistance is found at $103.40 and $104.50 from the mid-May consolidation. Support is back at $94.50 from the October high.
Written by Forexyard.com