Euro Correction Still Has Room to Run Before Bear Trend Resumption

DailyFX   |  June 12 2012 6:17 EDT

Although the Euro has been sold aggressively from its early Monday peak, we still see risks for additional upside over the short-term...

• Markets retreat from Sunday surge but should find support
• Technical picture offers more clarity than fundamentals right now
• Euro constructive in short-term while above 1.2385
• USD/JPY contemplates fresh upside back over 80.00
• UK industrial production doesn’t impress

Despite Monday’s pullback in risk sentiment, markets are not looking as bad as some might think. After all, the price action is somewhat deceptive given the massive gap open in risk correlated assets on Sunday night. While we would not take this as an overly bullish sign, we would also not recommend looking to head for the exits and position for more significant risk liquidation at this point. For now, our technical outlook seems to be offering more clarity, and while the Euro holds above 1.2385, we see risks for additional upside in this market following a bullish weekly reversal ending a sequence of four consecutive weekly lower lows and lower tops.

Relative performance versus the USD Tuesday (as of 10:10GMT)

NZD +0.77%

AUD +0.52%

CAD +0.36%

GBP +0.22%

CHF +0.21%

EUR +0.20%

JPY -0.09%

The Euro is the market that needs to be watched for directional insight into broader markets, and should this market remain supported in the 1.2400’s, we could still see yet another surge beyond Monday’s 1.2670 highs, towards the 1.2800-1.3000 area further up. Ultimately, this should result in higher currencies, higher equities and a lower US Dollar and Yen. Both the buck and Yen have already been sold from their earlier respective daily highs, with the Yen finding some relative weakness on comments from the IMF that the currency is overvalued. For this market, the key level to watch above comes in at 80.00 and a break and close back over this psychological barrier could once again accelerate gains.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD:The market is in the process of correcting from some violently oversold levels after breaking to yearly lows just under 1.2300. While our overall outlook remains grossly bearish, from here we still see room for short-term upside before a fresh lower top is sought out. Look for the latest positive weekly close to open the door for acceleration into the 1.2800-1.3000 area, where fresh offers are likely to re-emerge. Setbacks should be well supported ahead of 1.2400.

USD/JPY:The latest setbacks have been rather intense, with the market collapsing through the 200-Day SMA before finally finding support by 77.65. We have since seen attempts at recovery and we contend that the market should continue to break higher, with sights ultimately set on a retest and break of the 2012 highs by 84.20 further up. However, at this point, we will need to see a break and close back above 80.00 to officially alleviate downside pressures and reaffirm bullish outlook.

GBP/USD: Daily studies are now correcting from oversold and from here risks seem tilted to the upside to allow for a necessary short-term corrective bounce after setbacks stalled just shy of the 2012 lows from January. Look for the latest daily close back above 1.5440 to strengthen short-term bullish outlook, with acceleration projected into the 1.5800 area where a fresh lower top will be sought out in favor of underlying bear trend resumption. Only a close back under 1.5400 delays.

USD/CHF: While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, shorter-term risks are for more of a corrective pullback to allow for the market to establish a fresh higher low. As such, we see risks for weakness over the coming sessions towards the 0.9200-0.9300 area before the market looks to reassert its bullish momentum and broader uptrend.

--- Written by Joel Kruger, Technical Currency Strategist

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