Yen Continues to Extend Declines; Sterling Pressured by Dovish Minutes

DailyFX   |  February 22 2012 6:54 EST

The Yen has been under some intense pressure in recent sessions and continues to ignore oversold readings, while the Pound has also taken a hit on a surprising 7-2 split in BOE Minutes…

• Greece agreement out of the way but saga still ongoing
• UK Telegraph highlights some of the risks ahead
• Yen emerging as the major story amidst Eurozone mess
• USD/JPY breaks back above 80.00 for first time in 6 months
• Daily RSI at highest level in over 10 years
• BOE Minutes show some members wanted more QE
• European PMIs softer than expected

The fallout from the latest Greece agreement has been rather uneventful and the Euro remains locked in a multi-session consolidation. Although the development was indeed a positive one, investors are still anticipating more troubles out of the Eurozone over the coming days and weeks. The question on everyone’s mind right now is whether Greece will indeed be able to effectively implement the austerity measures required by the EU and IMF. The UK Telegraph has also dampened things somewhat after pointing out that with Greek elections just around the corner, there is still a good deal of uncertainty that needs to be priced in.

Relative performance versus the USD Tuesday (as of 11:50GMT)

1. CHF -0.02%
2. EUR -0.05%
3. CAD -0.12%
4. AUD -0.26%
5. NZD -0.32%
6. GBP -0.42%
7. JPY -0.66%

But with all of the attention on the ongoing Eurozone saga, some might be missing the more interesting price action in the market right now, with the Yen taking front and center stage. After months of directionless price action by record highs against the US Dollar, the Yen has finally started to breakout and to the downside for that matter, warning of a major structural shift. The recent moves by the Bank of Japan to increase bond purchases have not been taken lightly, and this is seen as the primary driver for the Yen selling.

Additionally, the impressive bid tone in global equities and the Nikkei in particular is also adding to the Yen depreciation. From here however, we think additional Yen weakness over the short-term could be a tough go, with technical studies so stretched and warning of a short-term correction. USD/JPY has broken back above 80.00, but there are some solid offers between 80.25-80.75 that should cap additional gains from here. It is also worth noting that the daily RSI in USD/JPY is at its highest levels since December 2001 when the market was trading above 130.00.

Elsewhere, the Pound has been the second worst performing major currency on the day thus far after the Bank of England Minutes revealed a 7-2 split on the vote to increase asset purchases, with the dissenting members appealing for an even more aggressive raising of the facility than what was delivered. German manufacturing PMIs came in on the weaker side of expectation but failed to materially influence trade.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Inability to close below previous key support at 1.3025 leaves the market locked in some multi-day consolidation, with no clear short-term directional bias. At this point, the key levels to watch above and below comes in by 1.3325 and 1.2970 respectively, and a daily close above or below will be required to open the door for the next major move. Until then, we can expect to see some choppy inter-day trade.

USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months.This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 80.00 over the coming sessions could prove short-lived with technical studies at their most overbought levels in over 10 years and warning of some corrective declines towards previous resistance now turned support by 78.00 before bullish continuation.

GBP/USD: The market is back to challenging the 200-Day SMA which managed to successfully cap gains on previous attempts. At this point, we continue to recommend fading any strength towards or just over the 200-Day SMA in anticipation for yet another topside failure and bearish resumption. As such, our recommendation would be to look to sell rallies towards 1.6000. Ultimately, only a close above 1.6250 would fully negate outlook.

USD/CHF: Setbacks have been very well supported in early 2012 ahead of 0.9000, and it looks as though the market could be looking to carve a medium-term higher low ahead of the next major upside extension. We will now look for a weekly close back above 0.9300 to provide added confirmation for probability of underlying bullish resumption. Ultimately, look for a push back above 0.9600 and towards 1.0000 over the coming weeks. Only a break and weekly close below 0.9000 would negate and give reason for concern.

--- Written by Joel Kruger, Technical Currency Strategist

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