15 December 2015 at 15:16 GMT
By John J Hardy
Key developments in FX today:
- The USD bounced back in connection with risk appetite today, as the early break higher in EURUSD to new local highs was turned back, USDCHF survived a test of the critical 0.9800 level, and USDJPY bounced from the local lows as well. Interesting also to note the false break today in NZDUSD.
From here, the USD needs to post a strong resurgence in the wake of tomorrow's Federal Open Market Committee meeting to get back on the rally track versus the rest of the major currencies after testing key support levels in recent days in several USD pairs.
- Riding the coattails of the greenback's general strength today was the pound sterling, which actually marginally outperformed the greenback, and as EURGBP posted a compelling bearish reversal that took place around a key Fibonacci (see the chart below).
EURUSD tested to local highs early today, but that attempt was roundly rejected and a solid 2.0% year-on-year November CPI print perhaps eased anticipation of Fed dovishness at tomorrow's FOMC meeting. Another self-reinforcing support for the USD is the bounce back in risk appetite measures, as it allows the Yellen Fed to take fewer pains to tiptoe around its first rate hike in over nine years. Looking further ahead, the next key support EURUSD needs to take out is 1.0800 and then the 61.8% Fibo of this latest short squeeze around 1.0730.
Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more
We saw a recent rejection of the modest bearish reversal recently, and now we have what looks like an attempt at a larger bearish reversal that was launched from the key 61.8% Fibo retracement at 0.7300. This is a more compelling setup for the bears, but one that likely requires a continued recovery in risk appetite and solid UK earnings/employment numbers tomorrow to punch through the recent support line that developed around 0.7200 and the 200-day moving average. EURGBP likely to correlate with EURUSD unless the market singles out GBP in the wake of tomorrow's UK data.
Source: Saxo Bank
The kiwi surge may finally be easing here – at least as evidenced by NZDUSD's rejection o the attempt to new highs, though we'll need to see whether tomorrow's FOMC meeting supports the greenback tomorrow. A lower close back deep into the range tomorrow kicks the bearish case into higher gear again.
EURSEK reversed hard on today's Riksbank meeting, which suggests the Riksbank will remain in a neutral stance for now, even as it talks up its potential to act if conditions warrant. The bearish pattern reversal could set up a fresh challenge of the sub-9.20 supports, provided we stay below the 9.30/32 zone.
Source: Saxo Bank
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank