Euro Pressured Early but Settles into Range on Slow News Day
Lower Asian and European equity markets overnight triggered
a break in the Euro early in the session, but stable U.S.
stock markets helped to hold it in a range most of the New York session.
Without any major economic reports to push the markets
around, traders have decided to focus on two elements: the start of U.S. earnings
season and the European bank stress results.
earnings season begins after the equity market close this afternoon. Since the
Euro has been taking its cue from equity markets lately, traders expect todayâ€™s
first report from Alcoa to move the market.
European stress test results are not due until July 23rd,
but that hasnâ€™t stopped traders from expressing concerns about the event.
Traders continue to question the toughness and transparency of the report.
There is also confusion as to how much information will be revealed and if the
publication of the results will be limited to only large banks.
The question of ordering banks to recapitalize came up late
last week when European Central Bank President Trichet mentioned in a speech
that it may be necessary.
Technically, the EUR USD confirmed last weekâ€™s daily closing
price reversal top at 1.2722. This pattern usually suggests a 2 to 3 day break
coupled with a 50% to 61.8% correction. This would make 1.2436 to 1.2369 the
next likely downside target.
Besides the cautious approach by investors ahead of the
Alcoa earnings report after the close, U.S. markets reacted to the sell-off
in the Japanese stock market. Japanese equities broke after the nationâ€™s ruling
party lost more seats than expected in Sundayâ€™s upper-house elections.
This new round of political uncertainty could mean more
economic woes for the country. Traders are worried that a drop in equity prices
could increase the chance of a double-dip recession. In addition, some
investors feel the economy will be threatened by the possibility of deflation
once government stimulus fades and if global demand declines.
The USD JPY was under pressure most of the night as traders
interpreted the news as bearish for the currency. Early last week the
Dollar/Yen posted a daily closing price reversal bottom. This bottom was
confirmed by a subsequent three-day rally. Although the chart indicates there
is room to the upside with 90.97 a potential upside target, traders should be
aware of a possible short-term correction back to 88.06 before moving higher.
Fridayâ€™s closing price reversal top on the daily chart in
the Euro was also confirmed overnight. The current chart formation suggests a
possible 2 to 3 day break back to 1.2436 to 1.2369 over the near-term.
Over the next two weeks earnings reports should be the key
market driver until the European stress tests are released. This means the Euro
is likely to take direction from the U.S. equity markets. Robust
earnings should drive stock prices higher and along with that, appetite for
higher yielding assets. Commodity-linked currencies should also see greater
demand if U.S.
stocks can breakout to the upside. Conversely, worse than expected earnings
results should trigger an equity market break taking the Euro and higher
yielding currencies with it. Lower demand for risky assets could be beneficial
for the Yen despite the recent political change.
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