1. S&P to retest 1150 - expected to consolidated sideways from 1150 or pullback to the 50 day MA.
2. USD - expect a pullback to 79.55-78.62 on easing concerns over Greece and a milder than expected NFP report.
3. Yen - expect to see continued weakness, especially against the Aussie and Canadian dollars.
3. Euro - may see a limited move to the up side but expected to be capped at 1.3850-1.4000
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The S&P 500 finished the week up 34 points (3.1%) after rising six days in a row. Stocks climbed despite widespread concerns over Greece (and other "Club Med" nations), unemployment and dismal housing sales reports (new, existing, pending). But now what? well, we're about to find out. The S&P has rallied straight into it's January resistance level. A confirmed break above 1150 is needed in order to see the S&P advances to new highs. But a retest of the 1150 level is more likely to end in sideways consolidation or a pullback to the 50 day MA.
DXY - USD Due for a Pullback
We repeatedly stated here that for the dollar, the worst case scenario is a lackluster, slow economic recovery with mild inflation. That is to say, a scenario in which risk levels are contained, but so are rate hike expectations. Last Friday's NFP number, although better than expected, was still negative. It was exactly the kind of "less worse" reading that is negative for the USD - enough to dissipate some fear, but not strong enough to invoke serious thought about interest rate increases.
Technically, the dollars bull run that started late in 2009 seems ready for a pullback. We should expect a pullback to at least 79.55 (10 day EMA) or 78.62 (38.2% retracement). A record number of short positions against the euro and GBP created the perfect set up for a short squeeze in either or both currencies. Any positive news coming out of either the UK, the EU or both, should prove negative for the US dollar, at least in the short term.
Japanese Yen
As usual, the biggest loser in a "risk on" environment is the Yen. The Japanese currency has several good fundamental reasons to weaken. You can check out Marc Chandler's blog for more information. If risk appetite prevails, and we see the market continuing to fade bad news, we can expect the yen to continue to weaken, especially against the loonie and Aussie.
Euro - licking the wounds
The Euro may finally get a few days of rest to lick its wounds as tensions over Greece ease a bit. But look at the following headline:
Sounds familiar, right? But consider this: the story is dated January 14th 2009 - more than one year ago! so what is my point? the point is that sovereign debt issues cannot and will not be resolved over night. It took months for the Greek crisis to peak but it was already well in play by early 2009. We can only assume that Dubai, California, and more relevant to the euro, Spain, Portugal, Italy, and Ireland will continue to dominate the headlines with a fresh supply of debt crises. Sovereign debt problems in the EU have had a more severe affect on the single currency due to the political and financial complexity of the EU. Neither German nor French citizens want to see their tax euros used to bailout Greece - and this is causing extra pressure on Merkel and Sarkozy. However, they cannot leave Greece completely neglected as inaction will undoubtedly increase the risk of contagion. The point is, again, there is no simple solution and euro rallies will be subjected to selling pressure. We should expect to see any upward moves capped at 1.3850-1.4000 level.
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