EUR/USD
Tuesday's strong recovery off 1.3855 brings the focus back onto the Mar. 7 reaction high at 1.4036. A break through 1.4036 is expected to attract further gains to 1.4085, and the monthly Ichimoku cloud resistance level at 1.4185. Corrective weakness has limited scope to the 1.3900 area, which protects the 1.3855 low.
GBP/USD
The corrective recovery off 1.5978 is set to extend above 1.6101 towards 1.6140 and Monday's high at 1.6199. However, this rally is forming the right-hand shoulder of a larger bearish head-and-shoulders top, and corrective upside risk is limited to the 1.6277 area. A return to support would threaten a neckline break, exposing 1.5837 initially, but with scope for 1.5770 on a slightly longer-term basis.
USD/JPY
The USD is back on its knees, as bears pile pressure on Monday's 2011 low at 80.60. A four-month bear pennant continuation pattern has been completed, and the base of the pattern at 80.21 is likely to be challenged. The key April 1995 all-time low at 79.75 is also vulnerable on concerted weakness. Short-term pivotal resistance lies at 81.22, and only above there would provide temporary respite, opening 81.55.
AUD/USD
The recovery off 0.9815 is expected to extend above 0.9953, and retrace most of Tuesday's wide-ranging down-day. A sustained push above 0.9953 would re-open parity and the 1.0062 resistance area, as part of an eleven-week lateral consolidation phase between 0.9804 and 1.0258. Failure to keep Tuesday's low at 0.9815 would create scope for bull flag support at 0.9743.
FOREX FOCUS
Last Friday and Saturday brought some good news for the euro zone and horrific news for Japan. Yet, in the aftermath, the euro has not only fallen against the yen but failed to make any headway against the dollar. Go figure. If anything, the compromise decision by European Union leaders to extend the European Financial Stability Facility and perhaps bring an end to the sovereign-debt crisis should make an early rise in euro-zone interest rates more likely. With the funding costs of peripheral debtor nations on the slide since the compromise was reached, the European Central Bank will be far less worried about increasing rates by 25 basis points next month. Higher rates, along with the reduced risk of a sovereign-debt default, should make the euro more attractive. But there are three reasons why this may not be happening. First is that compromise agreement. Despite initial optimism over the accord, there are reports of disagreement among finance ministers about implementation and concerns that the whole package still lacks any real teeth to stop member nations from falling short of achieving their fiscal goals. In fact, a certain amount of skepticism has gradually crept in. The strategy team at Commerzbank sums it up: "It seems increasingly likely that the measures (to be) announced on March 24/25 will not really satisfy the foreign exchange markets. Instead it can be expected that there will be more quantity than quality."
EUROPE
The euro took in its stride a ratings downgrade of Portugal overnight but attempts to push it past the $1.40 level against the dollar are proving difficult, while the yen remained steady as some semblance of normality returned to financial markets after share prices in Tokyo recovered some of their losses since the start of the week. That said, the outlook in Japan is still marked by uncertainty after the earthquake Friday and news on the escalating nuclear crisis in the country continues to keep investors on edge. "My suspicion is that this is temporary respite," Neil Mellor, currency strategist at Bank of New York Mellon said of the relative calm in the currency market. Analysts at BNP Paribas too noted some stabilization in confidence levels overall, but said that although the euro is finding decent support, the news surrounding the currency is still negative after Moody's downgraded Portugal by two notches to A3, making it hard for the single currency to pierce through $1.40. "Some of the shine has also been taken off the agreement made at the EU Summit and the Ecofin meeting, with Trichet criticizing the agreement for dealing with countries that have high debt levels as not being tough enough," they said in a note to clients, adding that the euro may dip towards $1.3860. Mellor at Bank of New York Mellon said he expects the dollar to emerge as the safe haven of choice despite the fiscal and monetary policy troubles in the U.S. As the yen continues to find safe-haven buying demand, it has been able to rise against the euro, he added
ASIA
The euro was slightly weaker in early afternoon Asian trading Wednesday after Moody's earlier announced a downgrade of Portugal's long-term government bond ratings. However, the selloff wasn't extensive, with most traders treating it as a distraction to bigger issues still ongoing in Japan. Some traders said the downgrade was simply "Moody's playing catch up" with other ratings agencies. "This doesn't represent a new wave of downgrades," said Sean Callow, currency strategist at Westpac Banking Corp. Moody's downgraded its ratings by two notches, to A3, saying the country will continue to face low growth and funding pressure for years, even if it taps the European Union's bailout fund. "Accessing the European Financial Stability Facility may lead to a reduction in financing costs, but questions would remain as to when the government would be able to re-access the capital markets and on what terms," Moody's said. The rating is now four levels into investment-grade territory, and is on negative outlook, meaning future downgrades are possible. At 0450 GMT, the euro was at $1.3970 from $1.4000 late Tuesday in New York. It traded hands at Y112.94 compared with Y114.22. The dollar was at Y80.82 from Y80.93. Japan's benchmark Nikkei Stock Average was up 3.4% in afternoon trade, giving up some earlier gains after an aftershock shook Tokyo. Despite the rise, share prices remain down sharply on the week. "There is a lot of bad news already in that price," Callow said.
WORLD
Nervous traders jumped into perceived safe havens such as the yen and Swiss franc Tuesday in New York as reports of further explosions at Japan's Fukushima nuclear power plant sent currencies tied to global growth sharply lower across the board. A full-blown nuclear disaster could put pressure on global energy supplies, stoke more oil-driven inflation and have a profound effect in slowing global growth. While higher oil prices typically feed headline inflation, which is normally positive for growth-tied currencies when central banks have to hike rates, these price pressures are also a longer-term drag on economic growth, said currency analysts. A case in point is the commodity-driven, export-tied Australian dollar, which is heavily dependent on exports to Japan, the world's third-largest economy, said Steven Englander, head of G10 strategy at Citigroup in New York. The Australian dollar fell by nearly 2% against the U.S. dollar Tuesday, the worst-performing G10 currency. "The Aussie does really well when conditions are good, and does badly when times are bad," exactly for these reasons, he said. Separately, the euro defied the safe-haven trend by surging still higher against the U.S. dollar, lifted by expectations of a rate hike come April that would burnish the currency's yield appeal. The single currency traded up past $1.4000 in late afternoon trade to its second-highest level all year.
