ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is in the midst of its sixth consecutive day of declines ahead of the “true” beginning of the week: the ISM Manufacturing (APR) report due out at 10:00 EST/14:00 GMT. To emphasize this idea (the “true” beginning), one must consider that the Federal Reserve Rate Decision today is not one of the top two events this week; that is a rare occurrence.

Instead, the main attractions this week come on Thursday and Friday, in the form of the European Central Bank Rate Decision and the highly anticipated US labor market report, the Change in Nonfarm Payrolls (APR) and the Unemployment Rate (U3) (APR). As Chief Currency Strategist John Kicklighter notes, the US labor market report “is the lynchpin to stimulus as the Fed is looking for a 6.5% Unemployment Rate to change its policy bearings.”

The ECB Rate Decision this week is particularly important because of soaring rate cut expectations among economists, financial media, and market participants alike (including this analyst). In the early part of this week, the Euro has rebounded ahead of the ECB policy meeting, in what I believe to be a “mirror” of the July 2011 ECB policy meeting. At that time, then-president Jean-Claude Trichet raised the ECB main refinancing rate by 25-bps, and the EURUSD tumbled by over 500-pips in the ensuing two weeks. The point is: the Euro’s direction hinges on what’s best for the Euro-zone growth picture, not necessarily the yield outlook. Bond markets have already priced a cut in, so if no rate cut comes, the Euro will be in a tough spot – either way, immense volatility is expected.

Taking a look at European credit, markets have frozen up ahead of the ECB Rate Decision on Thursday, providing little support or resistance to the Euro. The Italian 2-year note yield is unchanged at 1.073% while the Spanish 2-year note yield is unchanged at 1.648%. Similarly, the Italian 10-year note yield is unchanged at 3.881% while the Spanish 10-year note yield is unchanged at 4.112%; lower yields imply higher prices.

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RELATIVE PERFORMANCE (versus USD): 10:35 GMT

GBP: +0.26%

CAD: +0.18%

EUR: +0.17%

NZD:+0.16%

CHF:+0.12%

JPY:-0.11%

AUD:-0.13%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.04% (-1.36% past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: The data this morning has kept the pair lower, and once again holding near the magnetic 38.2% Fibonacci retracement on the July 2012 low at 1.2041 to the February 2013 high at 1.3710. The reaction seen today off the data was unique: aggregately, it points to a rate cut by the ECB; yet the EURUSD set its daily low the minute the inflation and labor market data was released. Perhaps this means the market is interpreting a rate cut as a positive (just as the July 2011 ECB rate hike under then-president Jean-Claude Trichet caused the EURUSD to fall). In either case, I’m neutral until the meeting, but will be looking to sell.

USDJPY: No change as price leaks below the 21-EMA: “The Bullish Ascending Triangle pattern was negated late last week and now price has traded below both the 8- and the 21-EMAs, amid a break in the daily RSI uptrend. On Friday I noted “the USDJPY appears ripe for a pullback, which could be provoked by a weaker than expected US 1Q’13 GDP reading.” With this transpiring, a break of the 21-EMA at 97.80/85 could see price extend its losses to former resistance now support at 96.60.”

GBPUSD: No change: “The GBPUSD is finding modest follow through (no doubt tempered ahead of the US 1Q’13 GDP print), pushing closer towards 1.5500 now that mid-April resistance at 1.5410/15 cracked yesterday. If the ascending channel range is to continue to play out, a run towards 1.5550 shouldn’t be ruled out. Declines should be supported in the near-term by 1.5340 (8-EMA) and 1.5285/90 (21-EMA).” The move towards the topside channel rail at 1.5540/60 should bring about some relief; and if the range is to hold, the next leg lower should begin in early-May.

AUDUSD: No change as daily price forms a small Inverted Hammer: “Last week I said: “Mid last week the 8-/21-EMA structure flipped bearish amid the breakdown in the RSI uptrend, coinciding with the rally off of the March 4 and April 8 lows. Fundamentally speaking, amid declining base metals’ prices and poor data out of China, it is our preference to sell the commodity currencies. Technically speaking, it is worth noting that the AUDUSD failed to find follow through on the potential basing pattern, a three day cluster of “Doji-Hammer-Doji.””The back-to-back Inverted Hammers haven’t seen any follow through and now the 8-/21-EMA structure is compressing to the upside, perhaps negating the bearish signal. I’m neutral but looking to sell a rally.”

SP 500: No change: “Is the top in? A dramatic sell-off yesterday dropped the SP 500 below the crucial 1570/75 area, former swing highs as well as the ascending trendline support off of the late-December and late-February swings lows – coincidentally the pre-fiscal cliff deal low and the post-Italian election low. We’re in a bit of “no man’s land” here, with either a close back above 1570/75 necessary for a retest of the highs, or a close below 1530/35 to signal weakness towards and below 1500.”

GOLD: No change: “The major support zone from the past 18-months from 1520 to 1575 gave way with fervor last week, as the combination of weak fundamentals (financial institutions scrambling for cash in Europe after Cyprus) and broken technicals produced the ideal selling climate. Precious metals in general have gotten hammered, and Gold has fallen back to the mid-March swing lows near 1380/85. A weekly close below 1430 this week leaves the possibility of a bigger dip towards 1305.”

— Written by Christopher Vecchio, Currency Analyst

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

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