FOREX PRO Weekly June 27 – July 01, 2011

There is no need to be a prophet to say that situation on the markets remains tough. As a confirmation of that we can point on USD/CHF downward acceleration as strong increase in demand for franc has taken place. Franc, by the way shows greatest appreciation in value, compares to all other currencies. Second, take a look at the yield of short-term Swiss bonds and their correlation with EUR/CHF. Third, significant yield decrease in US Treasuries and its staying at the low levels also confirms worries among investors. So, let’s discuss major events and unexpected issues that could come in nearest future.
Looks like rally in CHF will continue until market will give some confidence of calming and coming stability. Early indication of that will be changing direction of Swiss notes, because this will tell that investors are ready to take some more risk. Until that will happen, CHF appreciation should continue. Besides, USD does not look currently like absolutely safe-haven currency due to debt lawmakers’ disagreement problems in US.
Let’s start from US. The major ghost is debt ceiling question. The point is that this problem has to be resolved not later than in the early August, because otherwise total debt, including accrued interest will reach limit and US formally will not be able to issue US Treasuries and have to only repay it. That currently leads to default, since US have no ability to do that. Still, most part of the market thinks that US will make a decision of increasing debt ceiling. Speaking about long-term perspective, take in mind that total debt of US is not just US Treasuries that is about 14 Trillion, but if we include different social programs (Medicare, Students, etc) that is about 100 Trillion USD. Second, to 2015 the value of official debt will reach 103% of US GDP, if Government will not take hard steps in reducing of Budget deficit. So, as you can see long-term perspective of USD is under question and rising of debt ceiling currently is just a half a measure – a technical step to calm down investors, but it does not change the foundation of the problem. During July I suggest, we should to keep an eye on Congress schedule meeting, especially on Budget committee.
Other events are relatively supporting for USD – Greece problems, threat of rate hike in China will resurrect old feelings of disdain for liquidity removal in times of softer economic numbers and, finally, flowing 60 mln Barrels of oil by IEA.
Speaking about EU, demand dominating for safe-haven will remain untouched. Although there could be some relief for EU on Wednesday, when vote on Greek austerity measures will take place, still more probable that trade will be driven by news as very often has happened during past few weeks. Note that inter-Parliament and populous resistance seems elevated. Unless there are positive headlines from the weekend suggesting progress euro could become weaker into the vote. Even if Greece passes the austerity package, second important moment is macro data on coming week from Germany – EU PMI and CPI. If there will be poor figures from the euro zone’s largest economy – this will take away support from the euro.

EUR/USD comes in very crucial period of time and this is partially confirmed by technical analysis. Ahead of us should be decided such questions as QE II finish, Greece austerity measures and US debt ceiling. Any of these events could drastically affect future behavior of EUR/USD pair. You already see this nervous environment as on past week market action. One of our long-term scenarios is a move to 1.60 area. This could happen, for instance, due US technical default and rating downgrading to AA, or, otherwise, due super positive Greece problems decision. I’m telling all this stuff just to tune you on expectation of unexpected and be prepared to any scenario that just a couple of month ago have seemed as impossible. Don’t be deceived by summer period, when markets usually turn to calm and soft action.
As we’ve appointed previously that the major task for us – to estimate will we see deeper AB-CD retracement to 1.37 level or market will continue move higher. Currently this possibility comes on first stage and becomes more and more probable.
During the past two months market has shown retracement till nearest 3/8 Fib support at 1.4140 that stands very close to previous highs at 1.4276. Now it shows some bouncing from there. June as you can see now looks like inside trading month compares to May. Currently market shows second testing of 1.4140 area. As oftener market tests it as it becomes weaker. So, as we’ve said deeper AB=CD retracement now looks very probable.

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Still to absolutely be sure with bearish bias we need close below 1.40. Downward possibility also implicitly confirms with market overbought. Usual retracement target during overbought is zero point of Detrended Oscillator and this level stands around monthly Confluence support. Also its worth to note here that trend will remain bullish, even if market will reach 1.37 area. Still, if market will hold on first Fib support, this will be much better for current bullish bias and Butterfly pattern.
Nearest target stands at 1.5272, but potentially it could turn to butterfly “Sell” pattern. The target of this pattern is 1.27 extension at 1.6024. Also it almost coincides with 1.27 target of recent bullish AB-CD at 1.5925.
Also take a note that overbought level for June stands at 1.5162 – right at previous highs 1.5144. Market should close above highs at 1.4925 to give us some confidence on bullish move continuation.

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