ASIA/EUROPE FOREX NEWS WRAP

After being put through a bit of a ringer this past week – the US Dollar rallied after the Federal Reserve indicated it is shifting its strategy towards gradually tightening the liquidity spigot, and the Japanese Yen rallied amid the massive sell-off in Japanese bond and equity markets – the Euro has emerged as a top performer this week, building off of last week’s gains.

Although the EURCHF lost Sf1.2500 overnight (due to Franc strength), the EURUSD burst higher following a much improved German IFO survey that suggest s the German economy might have seen a bit of a resurgence in May. The survey, which showed that German business confidence increased for the first time in three months, raises the bar for 2Q’13 growth projections, which in my opinion should have little trouble beating the dour 1Q’13 report – whose final iteration was released today, showing that the economy grew by +0.1% q/q but fell by -0.2% y/y adjusted or -1.4% y/y unadjusted – as a spat of inclement weather impacted businesses and consumers alike.

While the EURUSD has thus far failed at cracking $1.3000, there is still a chance for later on today, when the US Durable Goods Orders (APR) report is released at 08:30 EST/12:30 GMT. A modest rebound is expected (+1.5% versus -6.9% prior (m/m)), although given the tempered trend of expansion in industrial and manufacturing production, there may not be much to see here besides the fact that the US economy continues to struggle to find firm footing.

Taking a look at European credit, the Euro has rallied despite higher yields in the periphery following the improved German data this morning. In my opinion, the higher yields attest to the fact that the European Central Bank will be less inclined to offer additional support for the struggling peripheral countries as long as the core remains strong. This may prove to be a negative pressure on the Euro – inaction and indecision on behalf of European policymakers has been one of the biggest problems of the sovereign debt crisis the past several years. The Italian 2-year note yield has increased to 1.401% (+2.7-bps) while the Spanish 2-year note yield has increased to 1.835% (+5.1-bps). Likewise, the Italian 10-year note yield has increased to 4.101% (+7.8-bps) while the Spanish 10-year note yield has increased to 4.353% (+8.2-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:30 GMT

CHF: +0.77%

JPY: +0.40%

EUR: +0.38%

GBP:+0.12%

CAD:-0.43%

NZD:-0.57%

AUD:-0.86%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.05% (-0.24% past 5-days)

ECONOMIC CALENDAR

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

TECHNICAL ANALYSIS OUTLOOK

EURUSD: On Wednesday I said: ”My bearish bias would be negated on a weekly close $1.3000/30 (May 14 swing high and 200-SMA).I prefer selling rallies into 1.2975/3000.” Today, price attempted to breach 1.3000 and failed, but evidence is growing that the Euro could stand to benefit from the recent uncertainty regarding the US Dollar and the Yen; there is very little uncertainty surrounding the Euro right now. I thus maintain a bearish bias, but a close 1.3000/30 will negate and imply a rally towards 1.3220/50 (mid-April swing highs). To the downside, a break of 1.2795/800 would confirm the move towards 1.2750 and 1.2680.

USDJPY: Although price has attempted to retake ¥102.50 today, further selling in the Nikkei alongside volatility in JGBs has stoked the revival of the Yen as a safe haven; certainly, the decline in the domestic equity market suggests that the domestic currency would gain in value anyway (intermarket analysis theory). Price is relatively unchanged from yesterday, as the reversal has cut through the key 101.80 level, leading to a deeper pullback to the 21-EMA at 100.80/90 on Thursday, and a run towards 101.00 earlier today. We are watching the 21-EMA, as it is pacing the ascending trendline support off of the April 2 and April 31 lows, coinciding with the same trend on the daily RSI. A further breakdown eyes a move towards 100.00, then 97.50.

GBPUSD: No change: “The GBPUSD is back pressuring last week’s lows. With price holding below the $1.5200/20 region I was watching last week, a move towards the early-April lows at 1.5035/75 now eyed….with daily RSI support cracked, the plan is to sell rallies. Indeed, the lower 1.5035 target was reached, and with the trade stretched to the downside, brief pause allowing the 8-EMA to catch up to current price could occur. I still prefer selling rallies towards the big picture move towards 1.4200.”

AUDUSD: No change: “The AUDUSD closed below the key 0.9860 level last week, ascending channel support off of the October 2011 and June 2012 lows, as well as the weekly 200-DMA. That is to suggest that a top in the pair back to the July 2011 high at 1.1079 is in place, though I’d prefer for a monthly close below 0.9860/900 for better confirmation. Now, a deeper pullback towards 0.9580 and 0.9380/400 is beginning. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold.”

SP 500: No change as the intraweek Bull Flag broke to the upside and hit top rail resistance at 1665 on Friday: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis)…It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).” Channel resistance from mid-April comes in at 1670, while support is at 1648 (8-EMA) and 1642 (steep channel support).

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

— Written by Christopher Vecchio, Currency Analyst

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

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form