Euro Breaks Above 1.4400; Kiwi Continues to Outperform to 26-Year Highs

Market conditions have returned to normal following the lightened holiday trade and with the resumption comes yet another round of USD selling....

Markets return to normal form on Tuesday following the lightened UK and US Monday holiday session, and there has been a fresh injection of risk appetite to go with the resumption in fuller trading conditions. Risk related currencies have been mostly very well bid, with end of month flows also seen driving additional volatility. The Euro has been able to rally back above the 1.4400 handle as market participants become more optimistic of an end to the Greek woes, while the New Zealand Dollar once again stands out after breaking to yet another 26-year high above 0.8250.

A stronger than expected business confidence reading out of New Zealand has been attributed for the relative outperformance, although the currency could still be at risk for a pullback following comments from Prime Minister Key who expressed concern over the strength in local currency. Elsewhere, Moody's has placed Japan's Aa2 rating on review for possible downgrade, with the Yen finding offers on the rating agency announcement. Meanwhile, in Australia, a widening in the trade deficit and softer private sector credit were seen opening yet another round of selling in AUD/NZD.

Looking ahead, Swiss GDP, German retail sales, the Swiss UBS consumption indicator and German unemployment will be the key economic releases in the European session, with the Swiss data taking on added significance after the Franc recently rallied to fresh record highs against both the US Dollar and Euro. US equity futures are tracking decently higher, while commodities are relatively unchanged.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: In the process of a corrective bounce following a 10 big figure drop in May with the market rallying from below 1.4000 and in search of a fresh lower top ahead of the next major downside extension below 1.3970. From here, look for any rallies to be well capped in the 1.4400-1.4550 area, with only a break back above 1.4550 negating negative outlook and giving reason for concern. Back below 1.4255 confirms and should accelerate declines.

USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00's with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks.

GBP/USD: The 100-Day SMA has proven to be formidable support for the pair, with the price rallying substantially out from the 1.6060 lows to trade back above 1.6500. However, we would expect rallies to now be well capped below 1.6600 on a daily close basis. Look for a lower top in the 1.6500 area ahead of the next major downside extension below 1.6000 over the coming days. Ultimately, only a daily close back above 1.6600 would negate outlook.

USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of a drop to yet another record low below 0.8500. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying on dips in anticipation of a major base. Look for current declines to hold around the 0.8500 area and a break back above 0.8740 to encourage basing prospects and open the door for the potential formation of a major interday double bottom (neckline by 0.8950) projecting gains back towards 0.9500. A daily close below 0.8400 would negate.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel's reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.