Pressure Remains on the EUR

The EUR continues to be pressured as a combination of Greek and Italian debt issues combined with a slowing of the global economy weighs on the EUR. This week is an important week as six G10 central banks meet along with a planned economic speech by President Obama.

Forex Market Trends

Daily Trend no no down down no no
Weekly Trend up up down down up up
Resistance 1.4700 1.6615 81.50 0.8550 1.1080 0.9080
1.4550 1.6450 80.20 0.8330 1.0800 0.8915
1.4300 1.6110 78.50 0.8240 1.0625 0.8815
Support 1.4050 1.6000 75.94 0.7710 1.0315 0.8700
1.3975 1.5780 0.7650 0.9925 0.8600
1.3835 1.5650 0.7515 0.9700 0.8530

Economic News

USD – Ugly Return to US Trading

US traders will return from their Labor Day holiday to find the state of markets in turmoil. A combination of the euro zone debt crisis and the slowing of the global economy are pressuring risky assets. With the US stock markets closed on Monday the S&P 500 looks to gap significantly lower upon Tuesday’s opening bell. As noted in yesterday’s daily analysis, US investors will be looking to both the President and the Fed for policy responses to stop the bleeding.

President Obama will speak on Thursday and will provide support with a fiscal response, most likely proposing an extension of the payroll savings tax cut, prolonged unemployment benefits, and a program to support employment with infrastructure development. The wild card remains the monetary policy response from the Fed. Economists continue to debate the merits of rolling the Fed’s short term debt it holds on its balance sheet into longer term Treasuries. Barring any significant fallout in the equity markets, QE3 remains relevant, just not for the September Fed meeting.

US data will be released today with the ISM services PMI due out at 14:00 GMT. The survey is expected to show continued weakness in the services sector though forecasts keep the data well above the 50 boom/bust level. The survey will be watched closely as it is considered a leading indicator in contrast to last week’s non-farm payrolls report which is a lagging indicator.

Prior to the European open the EUR/USD has made a push below the 1.4050 support level. Market positioning is directionless according to the most recent CFTC data and will be discussed in further detail in the FOREXYARD forex trading blog. The next support for the EUR/USD is found at the 200-day moving average at 1.4010. However, the real test will be the long term trend line from May 2010 which comes in at 1.3975.

EUR – Pressure Remains on EUR

European equities were hit on Monday though one has to point out the light volumes due to the Labor Day holiday in the US. Nevertheless, the German DAX finished the day down by a whopping -5.28% and the London FTSE 100 was lower by -3.58%. French banks were hit hard as US money markets continue to pull their funding.

A rumor of an Italian ratings downgrade was also spreading and the source appears to be the Société Générale Rates Strategy team who noted the possibility in their daily note on Monday morning. Comments from Mario Draghi, the Italian who is set to take over the helm of the ECB on October 31st was quoted in the wires as saying the ECB buying of Italian bonds is temporary and is not a substitute for fundamental budgetary discipline. Italian 10-year bond yields are up to 5.58%, above the 5% yield the ECB has tried to maintain. The Italian parliament is attempting to pass budget reforms with an aim to balance the budget by 2013 with EUR 14 bn in cuts and an additional EUR 6 bn in new taxes.

Greek bond yields continue to come under pressure with the 2-year rising to a record 50.37%. The Greek 5-year CDS also stands at a record 2493 bp. A default of Greece is at risk once again which could bring about additional pressure on the EUR and European equities.

The EUR/CHF is trading back near the 1.10 level after almost touching 1.20, a truly a remarkable move. The SNB risks losing both its hard fought gains in the pair as well as the central bank’s credibility should the SNB not step into the market to stop the appreciation of the CHF.

AUD – RBA Pauses for Global Uncertainty

The RBA agreed to hold its benchmark rate steady at 4.75% in light of the increasing risks to the European and US economies. Uncertainty in the global economy may only be temporary and the RBA maintained hawkish tone as inflation remains elevated and economic growth continues to increase due to higher commodity prices. On Monday company operating profits in Q2 rose 6.7% compared to a -2.2% decline in Q1.

On the other hand it appears the RBA is weighing heavily the global economic situation versus its own sovereign factors. The RBA may be leaving the door open to a holding period should the economies of Europe and the US continue to underperform.

The downturn in risk sentiment has left the AUD susceptible and the AUD/USD has sold off since Thursday’s high of 1.0763. Support for the pair stands at the mid-August low of 1.0315. As mentioned in yesterday’s daily analysis, traders should keep eyeing the AUD/NZD as the pair is encroaching on the neckline from a bullish head and shoulders pattern.

Gold – New All-Time High on Risk Aversion

Spot gold prices climbed to a new record high this morning as risk sentiment hit the wall following yesterday’s European equity losses. Risky assets were down across the board with higher yielding currencies and commodities all taking a hit. Traders have been eager to move into gold as systematic threats continue to plague the euro zone and the possibility of an additional round of monetary policy easing has kept traders from moving into the USD as typically occurs during periods of low risk sentiment.

The price of gold has recovered all of its losses from late August following the raising of margin requirements in a number of international exchanges. With the rebound in the price to a new all-time high this leaves the big round number of $2,000 as the next potential resistance. To the downside the August 25th low of $1,702.50 will serve as support.

Technical News

Last week’s candlestick highlights two key points; the inability of the EUR to maintain a bid above the 1.4500 level and the formation of an outside day down candlestick pattern on the close. As such the key support levels for the pair are found the 1.4100 level where the August 11th low coincides with the 61% Fib retracement from the July to August move. The other key level is the rising trend line from the May 2010 low which comes into play at 1.3975. To the upside resistance is found at this week’s opening gap of 1.4180 followed by 1.4325 and last week’s high of 1.4550.
The GBP/USD has the monthly, weekly, and daily stochastics falling while the price is encroaching upon significant support where the 200-day moving average and the August 11th low coincide at 1.6110. A break here could open the door to 1.6000 with additional support way down at 1.5780. To the upside the high from last Thursday/Friday at 1.6250 stands as initial resistance followed by 1.6450 and 1.6615.
The JPY has formed a base at 76.40 while failing to move below the all-time low of 75.94 set earlier in August. Weekly and daily stochastics have turned up but monthly stochastics remain firmly to the downside. Initial resistance is found at 77.70 followed by the post intervention high of 80.20 and finally at 81.30 off of the 2007 falling trend line.
The appreciation of the pair failed at the 0.8275 resistance and the long term downtrend continued with a vengeance, falling as low as 0.7710 before recovering slightly. There are two levels that stand out from the August move higher; 0.7650 at the 50% Fibonacci retracement and the 0.7510 at the 61% retracement.

The Wild Card

Pressure on the EUR continues across the board. Earlier this morning the EUR/JPY fell below the 108 support level. This break could open the floodgates to additional momentum strategy based forex traders. The next support for the pair is found at 106.70 from the falling support off of the July and August lows, followed by the pre-tsunami low of 106.25.

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