Currencies Expected to Consolidate Ahead of EU Summit Later this Week

• Markets off to quiet start in early week
• Unclear whether USD poised for additional gains
• EU Summit comes into focus
• Euro and Yen are key markets to watch right now

Markets are under a bit of pressure in the early week, although most of the price action is still consolidative. But, with currencies broadly coming back under pressure in the latter portion of the previous week and into the new week against the US Dollar, it will be interesting to see if this price action is indicative of a resumption in the more prominent underlying US Dollar uptrend, or whether currencies are simply in the process of carving a fresh higher low ahead of the next upside extension.

Relative performance versus the USD Monday (as of 10:20GMT)

JPY +0.68%

GBP -0.21%

CAD -0.43%

NZD -0.68%

EUR -0.69%

CHF -0.70%

AUD -0.71%

Fundamentally, the key event for the week doesn't come until Thursday and Friday in the form of the EU Summit, and we could therefore be in for an early week of directionless trade as market participants position ahead of the Summit. The expectation at this point is that EU leadership will afford both Greece and Spain additional time to get their respective budget deficits down. For now, we believe the key markets to watch are EUR/USD, with 1.2585 and 1.2440 the levels to watch above and below, and USD/JPY, which has recently found some renewed strength. Important short-term levels to watch in this market come in by 80.65 and 79.50.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: While our overall outlook remains grossly bearish, from here we still see room for short-term upside before a fresh lower top is sought out. Despite the latest pullback, the market still looks constructive in the short-term while above 1.2440. A closer look at the weekly chart still shows the pair putting in yet another weekly higher high and higher low. Nevertheless, a break back above 1.2750 will now be required to accelerate gains. Below 1.2440 negates.

USD/JPY: Some very constructive price action in recent sessions with the market clearing some critical short-term resistance by 79.80 and then breaking back above psychological barriers at 80.00. This now opens the door for a potential medium-term higher low in place by 77.65 ahead of the next major upside extension back towards and eventually above the 2012 highs by 84.20.

GBP/USD: Despite some intraday pullbacks, the bullish correction since early June remains alive, and we still see room for additional upside beyond 1.5780 and towards 1.6000 over the coming days. Ultimately, any additional declines are expected to be well supported around 1.5500, while only back under 1.5450 would compromise the outlook.

USD/CHF: While we retain a broader bullish outlook for this pair, with the market seen establishing back above parity over the coming weeks, there still seems to be room for additional short-term declines while the market trends lower from the peak in early June. Ultimately, a break back over 0.9660 would be required to end the short-term bearish correction and open the door for broader bullish resumption. Until then, risks remain for a deeper pullback towards the 0.9200-0.9300 area.

--- Written by Joel Kruger, Technical Currency Strategist

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