EUR/USD
Friday's sharp setback puts the key projected support level at 1.3540 under pressure. Last week's spinning top candle leaves the uptrend neutralized for now and a break below 1.3540 would attract further weakness toward 1.3425 and the Jan. 20 low at 1.3396. Keeping 1.3540 intact would prompt a recovery towards 1.3665 and 1.3715, but only a sustained push above the latter would re-open the 1.3760 high.
GBP/USD
Bears are protecting the 1.6000 level following the setback off last week's high at 1.5990 and support at 1.5826 is likely to be breached. Such a move would pave the way for further weakness toward the Jan. 25 low at 1.5752 and threaten a much sharp decline towards 1.5650 and 1.5490. Keeping 1.5752 intact would suggest more lateral consolidation is needed towards 1.5990 before the bear threat materializes. Only movement above 1.5990 would negate the bearish outlook, opening the Jan. 18 reaction high at 1.6058.
USD/JPY
Bears have regained control of the short-term following Monday's probe into fresh four-week lows below 81.85. The failure to hold onto last week's rally to 83.22 highlights the negative undercurrent and further weakness is expected toward a wave equality target at 81.37. A three-month bear pennant support line lies at 81.25 for Monday's session. Corrective strength is limited to the 82.50 area.
AUD/USD
Remains within a bear pennant and Monday's recovery off 0.9866 threatens a return to the upper half of the continuation pattern. Resistance at 1.0004 and 1.0023 lie in front of the bear resistance line at 1.0051, but an upside resolution is not expected. Loss of 0.9912 would threaten a return to the 0.9866 low and the bear pennant support line at 0.9854.
FOREX FOCUS
Like old New Year resolutions, the optimism in financial markets at the start of this year is quickly being forgotten. As January turns to February, markets are once again being driven by fear: fear that the rioting in Tunisia and Egypt will spread to oil producers in the region; fear that the rise in commodity and food prices is getting out of hand; fear that a euro-zone debtor will yet default; fear that China will hike interest rates and slow its economy; and fear that rating agencies will now become more aggressive in downgrading debtor countries. This is a far cry from the heady days earlier this month when confidence in the global recovery was on the rise and sentiment was being driven more by inflation and rate hike expectations instead. Risk was back on and investors were busy seeking higher returns. Right up until Wednesday, the Dow Jones Industrial Average was climbing to a new two-and-a-half-year high. But now, risk is most definitely off. The rot appears to have started in, of all places, Tunisia--a country associated more with cheap package holidays rather than with food riots, that not only managed to topple the Tunisian government but have since spread to Egypt and raised political tensions across the region. The demonstrators have not only focused global attention on the recent steady rise in food prices, with the price of wheat at a two-an-a-half-year high and the wholesale cost of sugar at a 30-year high, but they have instilled fear over what would happen if the governments of oil producers in the region were the next to fall. Safe havens have also become popular again as fears over euro-zone debts have returned. The euro may have been supported for much of the early part of this year by rising hopes of a political solution. However, the longer the market waits the weaker the solution looks, with European Economics Commissioner Olli Rehn confirming Thursday that the European Union will not increase the EUR440 billion of guarantees for debtor countries.
EUROPE
Political tensions in Egypt, where the clamour to unseat President Hosni Mubarak has been growing steadily, are helping support currencies perceived as safe in the European session Monday, namely the U.S. dollar, yen and Swiss franc. Earlier Monday, Moody's Investors Service Inc. downgraded Egypt's government bond ratings to Ba2 from Ba1, sharpening the focus on the Arab world's most populous nation and on wider perceptions of risk. But while stock markets around the world have been suffering falls as Egyptians take to the streets for a seventh day running, the impact on currency markets has been a little less clear. The Egyptian pound was weaker, and that led the Turkish lira lower. But while the U.S. dollar, yen and Swiss franc have all risen, their gains are stalling. Commodity currencies, including the Australian and Canadian dollars, were propped up amid concerns that troubles in Egypt may have a knock-on effect on commodity prices. The euro, meanwhile, has come back from the falls it suffered during Asian trading hours. The Egyptian pound hit a fresh six-year low against the dollar, with the dollar peaking just above EGP5.87. The Turkish lira fell, with the dollar rising to TRY1.6202, while the Israeli shekel eased to ILS3.760.
The big question remains how far the fallout from turmoil in Egypt will stretch. "The unrest in Egypt and the fear of a spillover into the rest of the Middle East is generating some safe-haven flows, although these are more muted than generally expected," BNP Paribas analysts said in a research note. "We would expect the dollar to remain supported, with the broader weakening trend seen over the past couple of weeks now coming to an end. The Swiss franc and Japanese yen are also likely to benefit to some degree in the current environment," they added. What began in Tunisia has spread to Egypt and there are reports of protests in Yemen and Sudan, but the area's major oil producers haven't been affected so far.
ASIA
The euro fell against the dollar and yen Monday in Asia as investors dumped the risk-sensitive currency on fears that ongoing political turmoil in Egypt could spread to its oil-producing Arabian neighbors. In Cairo, anti-government protesters are violently demanding the nation's longtime President Hosni Mubarak leave office, sparking armed robberies and a death toll of more than 100. The development prompted investors to sell risk-sensitive shares and the European common currency, and dealers said they are likely to keep falling for the time being. "What is possibly occurring now is a transition of the social structure in Islamic counties, and because the world has never experienced it before, nobody has a good idea of what might happen next," said Yoichi Itoh, chief analyst at STB Research Institute. Investors are now wary of the uncertain risk that similar protests will spread to nations with rich oil reserves such as Yemen, Jordan, and Saudi Arabia, which would severely hurt the global supply of crude. Market participants have started to factor in the world with an unstable oil supply, preparing for a scenario where their concerns turn into a reality. "Emerging nations' economic momentum may lose steam, and the global economy as a whole may see sharp declines in growth. That's negative for the euro," said Kenichiro Ikezawa, a senior fund manager at Daiwa SB Investments.
WORLD
The dollar and other safe-haven currencies gained on Friday in New York as investors sought refuge from the turmoil in the Middle East, where Egyptian protesters faced off against the police and army in violent clashes. The euro fell broadly as traders worried the single currency was at further risk as the political unrest in Egypt threatened to spread to neighboring Arab countries. In addition to the Egyptian situation, the dollar could be gaining allure as a safe harbor for investors worried that the year's early gains in stocks and other riskier asset markets could be reversed quickly. "With many secretly eying a retracement in the equity market, it makes sense to be holding dollars as a potential safety play," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn. Volatile markets showed investors were worried the political crisis could spread in the Middle East. Oil was also a huge beneficiary of the Egyptian turmoil. Traders are spooked that shipments through the Suez Canal might be disrupted, which would be a major blow to the global economy. The stock market decline has been exacerbated by the potential impact of disruptions in oil supplies. Light, sweet crude prices jumped and the Dow Jones industrial average fell more than 1%. "The Middle East story has grabbed people," said Tom Tucci, head of government bond trading at RBC Capital Markets in New York. The worry is that tensions "are going to spread and that there are going to be more uprisings and issues in the Middle East."
Copyright by Dow Jones News GmbH. All news is acquired with journalistic accuracy. No liability is assumed for delays or errors. This news summary was brought to you by Dow Jones on behalf of FxPro.com
