Euro's Setbacks Pile On as Moody's Downgrades Italy to 'Baa2'

High beta currencies and risk-correlated assets were well-supported in the overnight, with the Australian Dollar and the Euro failing to break yesterday's lows against the US Dollar, as market participants largely overlooked the disappointing Chinese second quarter GDP print. But despite this, which has sent the Australian and New Zealand Dollars significantly higher across the board, the Euro has failed to rally. In part, this is due to a sovereign downgrade for Italy, which saw its credit rating cut by two notches to ‘Baa2' by Moody's Investors Services.

While the downgrade has had little material impact on the Euro to the downside, it certainly has held it back relative to other risk-correlated assets. As noted in this column earlier, a strong way to gauge the intraday strength of the Euro is to examine the performance of Italian and Spanish bonds, to which the EURJPY and the EURUSD have been highly correlated to the past several weeks and months. The Italian 2-year note yield has dropped to 3.572% (-14.9-bps) while the Spanish 2-year note yield has sunk to 4.284% (-9.5-bps). Conversely, the Italian 10-year note yield has risen to 5.965% (+8.2-bps) while the Spanish 10-year note yield has inched higher to 6.583% (+3.0-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:46 GMT

NZD: +0.39%

AUD: +0.38%

CAD: +0.31%

GBP: +0.12%

JPY:+0.10%

EUR: +0.02%

CHF: +0.01%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.19%(+0.15% past 5-days)

ECONOMIC CALENDAR

The last session of the week brings about little in terms of key data out of Canada; but there are two data releases for the US that we will watch. At 08:30 EDT / 12:30 GMT, the US Producer Price Index for June will be released, which is expected to show slowing price pressures and in fact some deflation on a monthly-basis. At 09:55 EDT / 13:55 GMT, the July preliminary US U. of Michigan Confidence report will be released, and we expect confidence to remain lower.

TECHNICAL OUTLOOK

EURUSD: Fundamentally, the EURUSD could tumble precipitously as the US Dollar's outlook improves. Short-term technicals have relieved oversold conditions, suggesting that the rebound seen off of yesterday's lows may be it its final stages barring a new catalyst. Near-term resistance comes in at 1.2230/35 and 1.2285/90. Above that, interest lies at 1.2360/65, 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Support comes in the 1.2140/60 zone then 1.2075 (Bollinger Band). Given the measured move and Fibonacci extensions, we are looking for a move towards 1.1695-1.1875 over the next eight-weeks.

USDJPY: The USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low, with the neckline coming in at 80.60/70. Only a daily close above this level will signal the commencement of this pattern. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term support comes in at 78.95/79.00 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: Advances have been capped by the 10-DMA, most recently at 1.5571 on Wednesday (also the mid-point for the Bollinger Bands). New monthly lows were set today at 1.5440, suggesting that the seasonal trend in place will remain into next week. A daily close above 1.5580 reverses this trend and suggests a test of the monthly high at 1.5720/25. Near-term support comes in at 1.5390/95 (weekly low) and 1.5365/70 (Bollinger Band).

AUDUSD: After a test of 1.01 yesterday, the pair has rebounded after the Chinese second quarter GDP reading, which was largely priced in it appears (or rather, the disappointing print means that the People's Bank of China will need to ease further, which is bullish for risk-appetite). Near-term resistance comes in at 1.0210 and 1.0250/60. Support now comes in at 1.0155/60, 1.0120/25, 1.0080 (former intraday swing highs), and 1.0000/05 (50-DMA).

--- Written by Christopher Vecchio, Currency Analyst

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