Spanish Auction Results Well Received; Yen Shows Relative Weakness

• Key event risk behind us; markets will look to Eurozone solution
• Still chance of risk-off trade ahead, but not just yet
• Euro should see acceleration if breaks above 1.2750
• Spanish auction produces solid result
• German PMIs weaker; UK retail sales stronger
• USD/JPY breaks back above some key short-term resistance

All of the major event risk for the week is behind us, with the markets already digesting both the Greek elections and latest Fed policy decision. Both results were moderately risk positive, in that the pro-bailout party won the Greek election, while the Fed issued a statement that was very much in line with expectations. While it is true that the results of both of these events could have been even more risk positive via a majority government in Greece and additional quantitative easing from the Fed, net net, we see more likelihood for additional upside in risk correlated assets over the short-term, as the markets continue to price out the worst case scenarios.

Relative performance versus the USD Wednesday (as of 11:00GMT)

NZD +0.29%

GBP -0.08%

CAD -0.24%

AUD -0.25%

CHF -0.27%

EUR -0.28%

JPY -0.44%

Still, the global economy is far from out of the woods, and with ongoing stress in the Eurozone and an impending slowdown in China and the emerging markets, any additional strength in risk correlated assets is also likely to find renewed offers soon enough, but not just yet. For the time being, the focus will shift to European leadership for a conclusive solution on containing the crisis. So far on the day, the highlights have been better than expected GDP from New Zealand, softer German PMIs, solid UK retail sales, and a fairly well received Spanish auction. On the price action front, the Yen has been making headlines as the currency shows signs of relative underperformance.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: While our overall outlook remains grossly bearish, from here we still see room for short-term upside before a fresh lower top is sought out. Look for the latest positive weekly close to open the door for acceleration into the 1.2800-1.3000 area, where fresh offers are likely to re-emerge. Setbacks should be well supported ahead of 1.2400.

USD/JPY:The latest setbacks have been rather intense, with the market collapsing through the 200-Day SMA before finally finding support by 77.65. We have since seen attempts at recovery and we contend that the market should continue to break higher, with sights ultimately set on a retest and break of the 2012 highs by 84.20 further up. However, at this point, we will need to see a break and close back above 80.00 to officially alleviate downside pressures and reaffirm bullish outlook.

GBP/USD: Daily studies are now correcting from oversold and from here risks seem tilted to the upside to allow for a necessary short-term corrective bounce after setbacks stalled just shy of the 2012 lows from January. Look for additional upside towards the 1.5800-1.6000 from where a more meaningful lower top is sought out ahead of bearish resumption.

USD/CHF: While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, shorter-term risks are for more of a corrective pullback to allow for the market to establish a fresh higher low. As such, we see risks for weakness over the coming sessions towards the 0.9200-0.9300 area before the market looks to reassert its bullish momentum and broader uptrend.

--- Written by Joel Kruger, Technical Currency Strategist

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