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Published On: Mon, Sep 8th, 2014

Euro bearishness set to continue after some short-term consolidation

The euro has continued to depreciate against the dollar, and the market has anticipated the divergence; given the imminent Scottish referendum, the sterling is expected to lag behind the euro.

The EUR/USD has extended its downside, and the market has anticipated the divergence; given the imminent Scottish referendum, the GBP is expected to lag behind the euro.

The euro has continued its depreciation against the dollar, for the eighth straight week, the longest such period it has ever had. The market has anticipated the trend of divergence between the US dollar and the euro owing to the economic performance and the diverging monetary policy paths of the Fed and the ECB. Last week, the latter cut rates once again and committed to buying asset-backed securities and covered bonds.

The good number for German factory orders and the industrial output data which came out according to expectations indicate the German economy is not to slide into a recession, despite the shrunk GDP in Q2. Yet the weakest US net jobs increase so far this year may dampen the eagerness about the earlier start of the US rate cycle.

The medium and long-term euro bearishness suggest that the $1.3000-50 area should be taken to indicate a correction, instead of a consolidating trend. The lower limit should be around 1.2750-1.2800.

With the less extreme sterling position and the imminent Scottish referendum, it may be expected the sterling will lag behind the euro. The euro, while slumping against the dollar in the wake of the ECB’s announcement, did not make another dip against the sterling. The area the euro is likely to test against the British pound on the upside is 0.8000.
The USD/JPY touched a fresh 5-year high at 105.70 before the weekend. The short-term prospect is negative due to the unsuccessful test of the key 105.40 resistance zone. First support is spotted at 104.70, followed by 103.55.

Last week, the Australian dollar outperformed other major currencies, rising around 0.6 percent against the USD, and somewhat over 2% against the sterling. It could approach $0.9400 by the end of this week. That is in line with the 61.8% retracement following the July 1 high, slightly over $0.9500.

The Canadian dollar was the second best performer last week. The lower jobs data and the IVEY survey offset the trade surplus, which came out larger than expected. The 1.08-1.10 range looks solid for the USD/CAD for now. If the consolidation persists, the performance of the Canadian dollar may be unrewarding.

The US 10-year yield has probably reached the bottom, with the actual low on August 15, around 2.30 percent. The five day moving average exceeded the 20-day average by the week-end. The downtrend marked by the July and August highs could be around 2.49% by the end of the coming week.

The S&P 500 may experience further losses in the near future. No confirmation came by the RSI of the record high on September 4. The movement to the downside may continue to 1970.

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