London Session: EURUSD – how much further upside?
By Kathleen Brooks | December 1, 2012 12:06 AM EST
EURUSD received a boost this morning after it broke above the top of the daily Ichimoku cloud at 1.2995; it has mostly stayed above 1.30 during the morning session in London. The key thing to watch for now is can we get a weekly close above 1.30? If yes, this is a very bullish development for this cross. Momentum indicators don't suggest that this cross is overbought, so there may be some further upside to come. Above 1.3040 opens the way to re-test 1.3175 - the highs from September/October. This is a very stiff resistance zone, and it will be a big test for the euro bulls in the coming days if risk sentiment remains constructive.
No unifying theme in FX
Once again, there is no unifying theme in the FX markets today. The euro is strong along with the pound and the NOK, the commodity bloc currencies are weak while the yen is the major under-performer and the US dollar is mixed. The yen was under attack from the Asia session after the Japanese government announced a new $10bn stimulus programme. This is conveniently timed 2 weeks before the next general election and is expected to be used for further earthquake reconstruction and also infrastructure spending. The government, who is expected to lose the election to the opposition Liberal Democratic Party, is making a last ditch attempt to try and promote growth in the Japanese economy, which contracted sharply in Q3. Since the Japanese economy can't seem to rally on its own steam and export markets are hindered by slow global growth, stimulus is likely to be a major feature of future Japanese economic policy whoever wins the next election. The opposition leader Shinzo Abe has said that he would support more accommodative monetary policy from the Bank of Japan, now the government has jumped on the band wagon and provided stimulus of its own. Since stimulus means more yen in circulation, it should weigh on the Japanese currency in the long-term.
USDJPY - still looks good in the long-term but watch out for pitfalls
The weekly signals suggest that we are still in a long-term uptrend in USDJPY and today we saw USDJPY bounce back above 82.50. The next major resistance zone is 82.85 - from earlier this month - then 83.00, the highest level since April. Right now it appears that 84.00, the February highs, could be on the cards before the end of the year. However, this pair is still very sensitive to risk sentiment and the US fiscal cliff issue is still a major event risk into year-end. 10-year Treasury yields remain some way off their July lows of 1.37%, thus if the US does start to look like it will topple over the cliff edge then there is room for Treasury yields to fall further, they are currently trading just above 1.6%. Since USDJPY follows US treasury yields closely, if yields remain depressed, gains could be capped in the medium-term. Thus, even though we may fancy a higher USDJPY we think this trade will only meander higher and is at risk of sharp pullbacks during risk off events.
Green light for Athens
Risk in Europe subsided further today after the German Parliament approved the next tranche of bailout funds for Greece. This pretty much gives the go-ahead for funds to be transferred to Athens ASAP in time to pay public sector salaries and also to avoid defaulting on a bond redemption payment that is due next month.
Are Spanish bond yields reaching a bottom?
Although the problems in Europe are far from over, Greece is out of the danger zone for now. Spanish bond yields remain at some of their lowest levels since Q1, but they have risen today and are currently just below 5.4%. With Spain's large debt issuance schedule for next year it is hard to see Spain's yields falling that much further. Hence, their performance today may suggest that we have reached a temporary bottom in bond yields for now. This could weigh on EURUSD in the medium-term. Good support lies at 1.2950 then at 1.2880 - a cluster of daily smas.
No good news out of Washington
European stocks have weathered the negative comments and bipartisanship over the US fiscal cliff negotiations remarkably well. European stocks are higher and US stocks are expected to follow suit when they open later this afternoon. However, we don't expect this resilience to last. This week has seen some volatile conditions in stock markets as investors react to news-flow out of Washington. We expect this to continue and for markets to become even more sensitive to bad news coming out of Washington as we edge closer to the deadline on 31st Dec. If we do get a deal then 1,435 - the base of the daily Ichimoku cloud - is a major resistance zone. However, don't hold your breath as Democrats and Republicans are showing the same bipartisan interests as they did in summer 2011 during the debt ceiling negotiations. Back then the SPX 500 plunged to 1,100. So if negotiations get deadlocked then there could be a long way for the SPX 500 to fall.
One to Watch:
1, EURUSD - watch for a weekly close above 1.30
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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