The Euro Searches For Support, EU Summit To Provide Little Relief

Talking Points
Euro: EU Summit To Generate Little Support, ECB To Come Under Pressure British Pound: BoE Votes 8-1, Keeps Door Open To Ease Further U.S. Dollar: Index Hits Fresh 2012 High As Flight To Safety Gathers Pace Euro: EU Summit To Generate Little Support, ECB To Come Under Pressure
The Euro bounced back from a fresh yearly low of 1.2563 amid the renewed effort to address the sovereign debt crisis, but the threat of a Greek exit may continue to drag on the single currency as European policy makers continue to move in their own interest. As the EU Summit in Brussels takes center stage, headlines coming out of Europe will continue to heavily influence the EURUSD over the remainder of the week, and the meeting may reveal a growing rift within the group as the anti-austerity movement gathers pace. As French President Francois Hollande pushes for a euro-area bond, German Deputy Finance Minister Thomas Steffen quickly shot down the idea, and the conference may do little to restore investor confidence as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.
However, it seems as though the European Central Bank will carry its wait-and-see approach into the second-half of the year in an effort to secure its independence, and it seems as though the Governing Council is moving away from its non-standard measures as they have a limited impact on the real economy. At the same time, the Bundesbank argued that a Greek exit ‘would be significant but manageable within the help of cautious crisis management’ as region struggles to form a coalition government, but the threat of contagion may ultimately trigger a major selloff in the Euro as it sets precedence for the European periphery. As the EURUSD trades back above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, the pair may be carving out a short-term floor above the 1.2600 figure, but we will be keeping a close eye on the relative strength index as it continues to sit in oversold territory.
British Pound: BoE Votes 8-1, Keeps Door Open To Ease Further
The British Pound quickly pared the overnight decline to 1.5670 as the Bank of England Minutes revealed another 8-1 split within the Monetary Policy Committee, but the sterling may face additional headwinds in the coming days as the central bank keeps the door open to expand monetary policy further. Although the BoE saw a risk of undershooting the 2% target for inflation, the MPC said that the longer-term outlook for price growth limits the scope for more quantitative easing, and sees the recovery strengthening later down the line as the euro-area continues to pose a ‘significant threat’ to the U.K. In turn, we should see the BoE stick to its neutral policy stance for most of 2012, but the central bank may continue to move away from its easing cycle amid the stickiness in underling price growth. As the GBPUSD reverts back to the range-bounce price action from earlier this year, we may see the pair come against the 1.5600 to test for support, and we will continue to watch the relative strength index as it slips into oversold territory.
U.S. Dollar: Index Hits Fresh 2012 High As Flight To Safety Gathers Pace
The greenback continued to appreciate against its major counterparts, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh yearly high of 10,201, and the reserve currency may gain ground over the remainder of the week as the flight to safety gathers pace. In light of the headline-driven market, dismal developments coming out of the euro-area should continue to sap risk-taking behavior, and we may see the greenback continue to defy market expectations as it benefits from safe-haven flows. However, as the RSI on the USDOLLAR pushes back into overbought territory, we will need a move back below 70 for a short-term correction to take shape, and we will stick with our bullish outlook for the greenback as the fundamental outlook for the world’s largest economy improves.

¥ JPY, USD Well Supported on Haven Flows- NZD Searches for Support

 The Japanese yen is the top performer against a stronger greenback ahead of the European close with the USDJPY off by more than 0.26% on the session. Risk aversion flows are in full effect early this week with equity markets off sharply amid ongoing concerns regarding Eurozone stability and headlines regarding JP Morgan’s $2 billion write down late last week. Look for the high yielders to remain under pressure as traders jettison risk assets in favor of the perceived safety of the yen and the reserve currency.
The daily chart shows the USDJPY holding within the confines of a flag formation off the March highs with the exchange rate holding just above the 100-day moving average at 79.70. While our long-term bias on the pair remains weighted to the topside, we continue to eye favorable entries between the 61.8% Fibonacci retracement taken form the February advance at the 79-figure and the 79.70. A break below the 61.8% extension risks further losses with such a scenario eyeing daily support at the 200-day moving average at 78.40. A break above channel resistance offers further conviction on our directional bias with medium-term topside targets eyed at the 38.2% extension at 80.80 and the 83-figure.
The scalp chart shows the USDJPY breaking back below the 61.8% Fibonacci extension taken from the April 1st and 20th crests at 79.90 before testing soft support at 79.70. Subsequent downside support targets are eyed at the 78.6% extension at 79.40, 79.20 and the 79-handle. Interim resistance now stands with the 61.8% extension at 79.70 backed by channel resistance at 81.10. A close above this mark alleviates some of the downside pressure with topside resistance targets seen at the 38.2% extension at 80.60 and 80.85. Look for the pair to remain under pressure throughout the session as risk-off flows continue to support the yen with a move towards the 79-handle offering favorable long entries.
Key Levels/Indicators
The New Zealand dollar is the weakest performer in early US trade with a loss of more than 0.78% on the session. The high yielder remains at risk as broader sentiment remains under pressure with the daily chart showing the kiwi breaking below the 61.8% Fibonacci retracement taken for the December advance at 7845. Daily objectives are eyed at 7750 and the 78.6% retracement at 7675 with only a move back above the confluence of former channel support and the 61.8 retracement at 7845 likely to alleviate further downside pressure. Should a move would need to be supported by a rebound in broader risk sentiment.
The scalp chart shows the NZDUSD continuing to trade within the confines of a descending channel formation dating back to the April 27th high with the pair currently testing interim support at the 138.2% Fibonacci extension taken from the February 29th and April 12th crests at 7755. Subsequent downside targets are seen at 7720, the 77-figure, and the 161.8% extension at 7660. Interim resistance stands at 7780 and is backed by the 123.6% extension at 78.15 and channel resistance. We remain bearish on the kiwi with intra-day rallies offering fresh short-scalp opportunities. Note that only a breach above channel resistance would negate our short-term directional bias.

-Y- Yen Well Supported on Weak NFPs - AUD Searches for Support

Daily Losers & Winners

The Japanese yen is the top performer in early US trade with an advance of 0.43% against the dollar. A weaker-than-expected print on April non-farm payrolls weighed heavily on broader risk sentiment after the report showed the addition of just 115K jobs last month, missing consensus estimates calling for a print of 160K. While the unemployment rate surprisingly declined to 8.1% from 8.2%, it’s important to note that the decline can largely be attributed to discouraged workers leaving the labor force with participation rate falling from 63.8% to 63.6%. The data prompted risk aversion flows that have continued to support the yen with the dollar seeing a mixed performance as the weak data fuels speculation of further quantitative easing from the Fed.
The daily chart shows the USDJPY continuing to trade within the confines of a flag formation off the March highs with the pair breaking back below the 80-figure on the back of today’s NFP print. Initial daily support now rests with the 100-day moving average at 79.60 backed by the key 61.8% Fibonacci retracement taken from the February advance at 79-figure. Daily resistance stands with channel resistance and the 38.2% retracement at 80.80.

The scalp chart shows the pair holding just above the 161.8% Fibonacci extension taken from the March 21st and the April 1st crests at 79.85 an hour into US trade. Subsequent soft support targets are seen at 79.65, 79.35, with the 200% extension at 79.05 offering ideal long entries. Interim resistance stands at 80.10 backed by the 138.2% extension at 80.35 and 80.65. While our long-term outlook for the USDJPY remains weighted to the topside, we look for entries below 79.65.
Key Levels/Indicators

The Australian dollar is the weakest performer among the majors with a decline of 0.78% on the session. The high yielder has continued to track market sentiment with the AUDUSD breaking below key daily support at the 61.8% Fibonacci retracement taken from the December advance at 1.0240. As noted in Tuesday’s report, this level was our weekly target with today’s decline risking further losses for the aussie moving forward. The RBA’s monetary policy report released overnight has also added to the bearish tone with the central bank lowering growth and inflation forecasts citing risks to global growth ‘remain on the downside.’ Daily support is now seen at 1.0165 backed by the 78.6% retracement at 1.0075.

The scalp chart shows the AUDUSD moving back below former channel resistance dating back to 2/29 before finding solace around the 138.2% Fibonacci extension taken from the April 12th and 27th crests at 1.0190. Subsequent support targets are seen lower at 1.0170, the 161.8% extension at 1.0140 and the 1.01-figure. Interim resistance now stands with the 123.6% extension at 1.0220 backed by 1.0240 and the 100% extension at 1.0270. We continue to favor the downside on the aussie moving forward with rallies offering fresh short entries.
Key Levels/Indicators.