Weak Demand at Spanish Bond Auction Holds Euro Back

As the US Dollar is being sold-off with haste amid hope that the Federal Reserve is leaning more towards a third round of quantitative easing, the majors have rallied with relative ease the past day. Despite this, the Euro continues to lag high beta currencies and risk-correlated assets following a weak Spanish auction. The Bank of Spain sold 2-year notes earlier, and although they fetched 3.30%, demand was substantially weaker than it was last month, with the bid/cover ratio falling to 1.90 from 4.26. Similarly, the bid/cover ratio for 5-year notes dropped to 2.06 from 3.44.

While the results of the Spanish auction are shaking investor confidence in peripheral European debt, Italian sovereign credit continues to improve. The Italian 2-year note yield has dropped to 3.451% (-7.5-bps) while the Spanish 2-year note yield has increased to 5.088% (+19.3-bps). Similarly, the Italian 10-year note yield has dropped to 5.959% (-8.9-bps) while the Spanish 10-year note yield has risen to 6.932% (+5.8-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:40 GMT

AUD: +0.66%

NZD: +0.57%

JPY: +0.29%

CAD: +0.26%

GBP:+0.20%

CHF: +0.19%

EUR: +0.18%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.30%(-1.56% past 5-days)

ECONOMIC CALENDAR

The docket is thin today after various important releases earlier in the week, but there are still a few items of interest that are worth keeping an eye on. At 08:30 EDT / 12:30 GMT, USD Initial Jobless Claims for the week of July 7 are due: the rebound last week was due to “seasonal concerns,” so seeing a continuation of the trend of lower claims would bolster sentiment. At 10:00 EDT / 14:00 GMT, USD Existing Home Sales for June and the USD Philadelphia Fed Index for July will be released: the former is expected to see a modest uptick, erasing the losses from May; while the latter should signal a slight rebound in manufacturing in the mid-Atlantic region.

TECHNICAL OUTLOOK

EURUSD: The EURUSD continues to flag higher, range bound with higher highs and higher lows, but that changes little when looking at the pair beyond just a few days. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875. Near-term resistance comes in at 1.2315/20 and 1.2360/65. Above that, interest lies 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Support comes in at 1.2255/65, 1.2200/05 (Bollinger Band), 1.2175/90 (lows from Monday and Tuesday), and 1.2160/65 (July lows).

USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there, but the bullish pattern is in question now that the Right Shoulder has broken as support, and our interest lies in seeing if there is a daily close below it at 78.60. If so, we suspect further losses towards 78.15/25. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.00/05 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: The pair closed above its 50-DMA yesterday and broke out of a short-term descending channel, in what perhaps may be a Bull Flag on the 4-hour/daily charts. Near-term resistance comes in 1.5720/25 (former swing high), and a close above this level will signal the beginning of a measured move up towards 1.5890/1.5905. Above that, selling interest could return at 1.5745/50 (200-DMA) and 1.5775/80 (June high). Near-term support comes in at 1.5580, 1.5460/65 then 1.5390/1.5405 (monthly low, Bollinger Band).

AUDUSD: The pair is working higher in two separate ascending channels, hitting resistance at 1.0430 in the less steep of the two. A daily close above this level signals a rally further up into 1.0470/75 (April high). However, short-term charts are looking overextended at current price, so it's possible there is some consolidation/downside price action before the next leg higher. Near-term support comes in at 1.0385, 1.0325/30, and 1.0135/55.

--- Written by Christopher Vecchio, Currency Analyst

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