The euro is not oversold from a daily perspective but it is approaching some solid support levels that could provide quality buying opportunities.

On Wednesday, the euro’s nearly 300 pip fall against the U.S. dollar was the largest one-day fall since September of 2008. That’s worse than any single day during the European debt crisis. Without doubt, we see the euro moving lower from here in the medium term. In the short-term, however, we are nearing uptrend support and support from the June low of 1.2737.

We could see a further slide close to support on Friday, especially if U.S. retail sales disappoint. But looking to next week, there is very little on the data docket to spook the broad market. To us, that skews the risks toward a mild recovery trade. With that in mind, we would look for opportunities to buy the euro at below 1.28 with the expectations that we will see a re-test of 1.30 in the week ahead. If the euro does return to 1.30 we will be quick to take profits and initiate short positions for an eventual fall to new lows.

The U.S. dollar has become the dog of the foreign exchange market and we expect the EUR/USD to continue rallying after a short pullback. The USD eked out only small gains against only the CAD and AUD on Thursday and experienced substantial declines against EUR, GBP and JPY. The market is beginning to grab hold of a theme that the U.S. economy will underperform expectations. Although we have seen a slight rebound from the dollar early on Friday, the overarching theme remains.

The trigger for the sudden surge in USD selling was Wednesday’s minutes of the June 22-23 meeting. In them, the Fed lowered growth forecasts and said the U.S. economy may not fully recover for 5-6 years from the Great Recession of 2007-09. Richmond Fed President Jeffrey Lacker, who is usually optimistic, even allowed that the U.S. will recover “perhaps at a pace that is less robust than has been typical of past recoveries.” Financial regulation reform, which passed on Thursday, is also making the U.S. a less competitive hub of global finance.

At the same time, the focus is shifting away from Europe. A recent sovereign downgrade of Portugal by Moody’s elicited hardly a blip in the forex market. On Thursday a successful Spanish bond sale further reinforced that a euro breakup and sovereign defaults are no longer a pressing concern.

The huge rally in EUR/USD yesterday pushed the euro above the 100-day and 100-month moving averages and points to a continued recovery in the euro. Expect the consolidation that has begun in Asia to continue as the week comes to a close. The RSI isn’t overbought and there is plenty of technical fuel for a rally but the odds favour intraday shorts on Friday.

Our trading in USD/JPY has been outstanding. We have picked several turning points in a row and we’re feeling good about calling another one.

The yen is the laggard (USD/JPY strength) after an election loss for the ruling Democratic Party of Japan ramped up worries about political instability.

The DPJ, which has been ruling for one year, was beaten badly and fell to 44 seats compared to 51 for the Liberal Democratic Party. Smaller parties have already ruled out any coalitions that would ensure the 56 seats needed for a majority. The Lower House is the power-base of Japanese politics but the loss will hamper policy-makers and could stall or kill a proposed sales tax increase that would help to put Japanese finances in order.

Frankly, we haven’t been that impressed with the sell-off in JPY despite the disastrous election result. We see the recent USD/JPY strength as a standard retracement and the 50% Fibonacci retracement is already providing resistance. The measured target of the double-bottom at 86.96 has been met.

There is some talk that the DPJ’s loss could help to boost the yen. Prime Minister Naoto Kan has in the past said he is in favour of intervening in the forex market to weaken the yen in order to boost exports. Due to the election loss, there is growing speculation that the DPJ may push for a leadership change in a September party election.

Technically, the more powerful indicators are pointing lower. Sell here.

We haven’t written often about relative value amongst the commodity currencies here, but it’s a topic we have given some additional thought to over the past two weeks.

We have been watching as the Australian dollar underperforms its Canadian counterpart.

Since the start of February we have seen this pair awake from its sleepy state and show some interesting volatility. On days when risk aversion rises substantially, we see the Canadian dollar outperform the AUD while on days like Tuesday, the opposite happens.

The takeaway might be that a leveraged AUD/CAD carry trade is in play. We applaud anyone who has been involved in this trade as the pair rallied from 0.77 to 0.99 and earned a reasonable amount of interest since Feb. 09.

The game looks like it is up, however, as we saw the first unwind in late December. this makes a great deal of sense, as longer-term players would be booking a year-end profit.  The trade recovered on the first trading days of the year but struggled at 0.96 and the slump last week looks like it shook out some of the longs.

We believe that levered, macro, long-term longs are involved in this trade but are growing increasingly worried. We know this about carry trades: when they unwind, they unwind fast. If we see the 200-day moving average taken out again and then see 0.9199 breached, we expect to see the pair fall further. Perhaps to 0.8992 followed by 0.8780.

We recognize, however, that if sentiment improves, this remains a very attractive carry trade with minimal volatility. In an improving economy, Australia will hold a yield advantage over Canada for the foreseeable future. If the downward sloping trendline we have drawn breaks, we will exit shorts.

On Tuesday, the pair traded in a range 0.9273 to 0.9386 as the AUD rejected support at the 200-day moving average and put in a strong rally. So far today, the pair is indecisive, trading between 0.9343 and 0.9385. Support is at 0.9312 but nothing substantial until 0.9258. Resistance is at 0.9387 and 0.9418.

As anticipated, we saw a big breakout in USD/JPY. It was to the upside after the Bank of Japan announced an emergency meeting for today. They will likely implement further quantitative easing measures to combat deflation. The effect is most likely to be a further yen negative unless the BOJ announces some very limited measures.

As noted earlier, 87.53 will be a key resistance level to break if we are to see a continued USD recovery.

A failed attempt to break 138.50 established a long-term triple-top on EUR/JPY charts and has led to a substantial 300 pip pullback. This chart has been a easy one to trade for technical traders and given the historical volatility of the pair around tops, this move may still have some way to go.

Looking at the hourly chart, a pattern of sharp drops and retracements is evident. After the initial drop, there is a nearly perfect 38.2% Fibonacci retracement. The second leg down was followed by a nearly 50% bounce and third leg by only a 22% rebound. In the most-recent leg, we have already seen a 38.2% retracement.

If that correction can exceed 50% (135.61) then the hourly downtrend may be in jeopardy. In that case, look for some stronger consolidation around 136.22 – 136.33 as another cue to sell. If then downtrend continues, look to support at 134.87.

Today we will talk a bit about the cross currencies that are traded in the fx market. Many of us know that in the fx market we can trade with the majors (Those include the currencies traded against the USD), commodities ( those include oil ,gold ,silver and those are traded against the USD as well) and  of course last but not least are the crosses, many traders, professional and new are still wondering how to read and analyze the crosses. The answer to this is very simple, we will take for example the pair GBP/JPY what most of you didn’t know is that if we will break this pair up,  we can find there 2 pairs that directly effect it overall performance, those pairs are the GBP/USD and USD/JPY. By observing these 2 pairs we can clearly see the direction of this pair. For example if we follow the trend of the last week, we see a stronger Yen against the USD and a weaker GBP against the USD, thus we can determine that the Yen is going to gain strength against the GBP as well.

Let’s go a head and analyze this amazing pair:

GBP/JPY

Over the last few weeks we saw how the GBP and the JPY moved in a range between 163.00 to 148.00 over a daily chart.  Then the support line for the GBP broke and we can find that in the last few days the GBP is getting weaker while the JPY appears to be gaining strength. It is not easy to analyze where this pair will go from here.  The market can find a resistance at 144.20, but for that we will need to get some results from the fundamental news coming out today from the U.K, US and Japan.

Keep your eyes open and look for the trend this pair will set following the announcement today.

Resistances

143.70 – 145.50

Supports

141.35 – 140.30

Fundamentals:  We have a few announcements today which will affect the market.

Coming from United Kingdom, we have the “Confederation of The British Industry Realized Sales”.

The previous announcement was -16 and the forecast for today is -15. (10:00  GMT).

one more announcement coming in from United States is the “Consumer confidence” which will be released at 14:00 GMT. The previous announcement was 54.1 and the forecast for today is 56.8. Look out for both announcements to have an impact on the market today.