Daily Report: Euro Recovers in Quiet New Year's Eve Trading

The forex markets are pretty steady in the last day of 2010. Euro got a lift on short covering in crosses as well as by comments from German Chancellor Merkel. Merkel said in an advance text of new year speech to the nation that Euro is far more than just a "currency", but the "foundation" of German economy. She urged that "we must strengthen the euro" as "Europe is in the midst of a great test." The common currency is seen noticeably higher against Swiss Franc and Australian dollar. Short covering in these two deeply oversold crosses helped lift Euro higher against dollar and yen and extended EUR/GBP's rebound.

IMF chief economist Olivier Blanchard said that markets' worry of massive European bailouts appears to be overblown and said the bailout component can be "quite limited". Though, he urged more transparency, including details about clues of sharing the burden between EU, national governments and creditors and said that's the only way to boost confidence. Meanwhile, he also predicts a "two-speed" economic recovery in 2011 and beyond, "low in advanced countries, fast in emerging-market countries."

Center for Economics and Business Research CEO Douglas McWilliams warned that "if the euro doesn't break up, this could be the year when it weakens substantially toward parity with the dollar." Douglas said that the reason for breakup would be " failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term." He reinstated what's said in a previous CEBR report that there is only a one-in-five chance for Euro to survive in its current form for ten years.

Dollar index's break of 79.55 support indicates that rebound from 78.83 is completed at 80.82 and fall from 81.44 is possibly resuming. We'd anticipate the index to be soft from now till at least the first few days of 2011 and further decline should be seen through 78.83 support to test key near term support level at 77.97.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 107.65; (P) 108.28; (R1) 108.97; More

EUR/JPY's recovery from 107.60 extends further and the developments suggests that a short term bottom is in place with bullish convergence condition in 4 hours MACD. Intraday bias is turned neutral and stronger recovery could be seen to 109.50 resistance and above. But after all, near term outlook will remain bearish as long as 112.18 resistance holds. Whole decline from 115.65 is still in favor to continue and below 107.60 will target a retest on 105.42 low.

In the bigger picture, more consolidation could still be seen above 105.42 medium term bottom. But even in case of another rise, we'd expect strong resistance at 55 weeks EMA (now at 117.10) to limit upside. On the downside, break of 105.42 low will indicate that long term down trend from 2008 high of 169.96 has resumed for 100 psychological level and below.

EUR/JPY 4 Hours Chart