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Quarterly Technical Analysis

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Euro consolidated in a ‘flag' formation

Tue, Apr 3 2007, 08:54 GMT
by Nicole Elliott

Mizuho Corporate Bank

Quarterly Outlook for EUR

Comment: For most of Q1 the Euro consolidated in a large ‘flag’ formation, just as it did between May and November last year. This continuation pattern should lead to another burst higher in the trend to a stronger Euro that started in 2001. The next target is 1.3500 and probably the December 2004 all-time high of 1.3670. We would then expect some consolidation either side of 1.3500, probably at least until the middle of Q2 2007. The difficulty will be in deciding how wide price swings either side of here might be. At the moment we doubt that these will be more than 4 or 5 US cents, but with uncharted territory the danger is that moves accelerate and extend beyond what would normally be the case.

A weekly close clearly below 1.3000 forces us to adjust our view in terms of its magnitude and timing.

Quarterly Outlook for GBP

Comment: Considering we are trading at some of the highest levels in a quarter of a century, and ones we all know and maybe remember, Cable is holding relatively neatly around 1.9550. Expect repeated if cautious upside tests over the coming month. There is a very real prospect that some time later in Q2/Q3 2007 we shall break above 2.0100 (high September 1992) towards 2.1000 and levels not seen since 1981. Do not expect a straight line move. We are currently pencilling in many price swings either side of 2.0000 this quarter. Something in the region of five cents either side of here.

A monthly close below 1.9000 forces us to adjust but not review completely.

Quarterly Outlook for JPY

Comment: For the first month this quarter, maybe longer, $/Yen should hold above the pivotal 115.50/114.50 area. Expect a series of random swings either side of 117.50, probably holding between 115.50 and 119.00 most but not necessarily all of the time. Later in Q2 a sustained break below here is likely leading to a drop to the 112.50/112.00 level short term and 109.00 medium term.

A monthly close clearly above 120.00 would force us to re-think.

Quarterly Outlook for EUR/GBP

Comment: The Euro dropped to 0.6550 last quarter and then bounced quickly higher, as expected. That was this year’s excitement and over the next three months things should be a lot more boring. Allow for random small moves between 0.6700 and 0.6900 most but not all of the time.

A weekly close above 0.7000 or below 0.6550 forces us to review.

Quarterly Outlook for EUR/JPY

Comment: As is so often the case with $/Yen and Yen crosses, they squeeze higher and then punish novices with an especially severe shake out. The corrective process is expected to last through to the end of April at least, with another very sharp sell-off a distinct possibility. It may even be more dramatic than February’s collapse taking the pair below 150.00 very briefly. Once this is out of the way we expect a break above this year’s high at 159.63 to the 1998 high at 164.00. This is seen as the last leg of a protracted move that started in 2001. Note that few good chart levels on the way up mean that an extension above 164.00 must also be factored in, with a target of 170.00.

A weekly close well below 150.00 suggests a major long term top is already in place.

Quarterly outlook for GBP/JPY

Comment: During April this cross is expected to consolidate roughly between 220.00 and 234.00. Late in Q2 or perhaps early Q3 we favour a rally to new highs for the year in a generalised move out of the Yen and into other major currencies. This could lead to a dramatic ‘extension’ and ‘blow off top’ somewhere between 250.00 and 260.00 marking the end of the rally that started in 2001.

A monthly close below 220.00 suggests a major top is already in place.

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Published on  Tue, Apr 3 2007, 10:56 GMT