http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/opening_comment/2011/01/05/Euro_Holding_True_to_Form.html
We were not at all surprised to see the sell-off in the Euro on Tuesday, following an early surge above 1.3400. Technically, we have been talking of the expected formation of a medium-term lower top by 1.3500, with any rallies above 1.3400 to be very well capped. The latest sharp pullback reaffirms our outlook and once again puts the pressure back on the downside with the market eying a retest and break of the critical lows by 1.2970 over the coming sessions.
Fundamentally, the initial Euro selling was triggered by some bearish comments from the PBOC president on the outlook for the Chinese economy, while DIW’s negative views over the prospects for a healthy German economy were also seen weighing. Meanwhile, economic data out of the US has continued to show impressive recovery, with the most recent releases coming in the form of solid ISM manufacturing and factory orders. The resurgence in the US economy has also now been reflected in the latest FOMC Minutes from December with the Fed outlining that it is expecting growth to pick up. As we have already talked about in previous commentary, Fed monetary policy can only really go in one direction from here, and as the central bank becomes less accommodative, the USD Dollar should find additional support.
Another interesting point of note is that the latest IMF COFER (Currency Composition of Foreign Exchange Reserves) data which shows the aggregate of FX reserves for 106 countries shows an impressive increase in the amount of USD reserves, while at the same time also showing that central banks have been moving away from the Euro. While data like this should be taken with a grain of salt, as there are a number of factors that need to be considered, we definitely would give it some recognition in terms of the general negative sentiment shift in the Euro.
Moving on, as we glance at developments in the other major currencies we see that USD/JPY has been recovering, but still needs to establish back above the Ichimoku cloud top to officially secure the latest bounce; Cable continues to consolidate but ultimately remains well offered on rallies and looks like it wants to break lower towards 1.5295; USD/CHF has finally accepted a fresh record low for now by 0.9300, and could be in the process of carving out a major base; The Australian Dollar has been showing some relative weakness and AUD/USD is now threatening further retreat well below parity; and USD/CAD has once again rejected the notion of being comfortable below parity, with the market mounting and impressive recovery and once again looking to extend gains back towards 1.0200 initially over the coming days.
Looking ahead, German (58.3 expected) and Eurozone services PMIs (55.0 expected) are due at 8:55GMT and 9:00GMT respectively, followed by UK construction PMI (51.0 expected) and official reserves at 9:30GMT. Eurozone industrial new orders (1.5% expected) and PPI (0.3% expected) cap things off for the European session at 10:00GMT. US equity futures and oil prices are tracking lower, while gold recovers a bit and trades with a mildly bid tone.
Written by Joel Kruger, Technical Currency Strategist
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