• Greece political uncertainty fuels fears of contagion
• Euro under pressure but yet to close below 1.3000
• Commodity bloc and emerging market FX most exposed

The ongoing political turmoil in Europe continues to shake the markets, with the inability for Greece to form a government now fueling speculation that the country might soon exit the Eurozone. Although an exit by Greece would have only a minimal impact on the broader economy, given the country’s size, fears of contagion seem to be the bigger problem right now, as investors start to price in the impact this will have on larger economies like Spain and Italy.

Relative performance versus the USD Wednesday (as of 9:25GMT)

JPY -0.25%

CHF +0.21%

EUR +0.22%

GBP +0.25%

NZD +0.36%

CAD -0.39%

AUD -0.56%

Technically, we have said that a close below 1.3000 would be a very bearish development for the Euro, as we have not seen a daily close below 1.3000 since January. With this in mind, Euro bulls can still hold onto some hope at this point, as the market has yet to officially put in a daily close below 1.3000. As such, we continue to recommend proceeding with caution at current levels, and only recommend looking to get more aggressively bearish the Euro on a daily close below 1.3000. A daily close below 1.3000 should then open the door for acceleration back towards the 2012 lows from January at 1.2625.

Despite the fact that all of the problems right now are Euro-centric, the Euro is still not the weakest currency in the current market environment, as the higher yielding risk correlated markets get hit even harder. We have been seeing some underperformance namely on the commodity bloc and emerging market FX, and should investors continue to look to flee to safety, we project that these markets will continue to underperform. As such, look for more weakness from currencies like Aussie, Kiwi and Cad, and from the more exotic markets like the Mexican Peso, South African Rand and Turkish Lira.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has finally cleared some key support by 1.3000 and the break opens the door for deeper setbacks over the coming days towards the 2012 lows from January at 1.2620. However, short-term technical studies will need to unwind from oversold readings before we are to see any extended declines below 1.3000, and we recommend looking to sell into rallies into the 1.3150-1.3200 where a fresh lower top is now sought. Additionally, we recommend waiting for a daily close below 1.3000 before getting aggressively bearish. Ultimately, only back above 1.3300 would delay.

USD/JPY: The latest pullback from the 2012, 84.20 highs is viewed as corrective and it looks as though the market could still see a bit more weakness before considering the possibility for the formation of a medium-term higher low. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate.

GBP/USD: Finally starting to see signs of a medium-term top and potential 2012 high after the market has stalled and retreated from the 1.6300 area. Key support now comes in by 1.6075 and a break and close below this level will confirm bearish bias and accelerate declines towards 1.5800 further down. Ultimately, only a break back above 1.6300 would negate and give reason for reconsideration.

USD/CHF: Our core constructive outlook remains well intact with the latest setbacks very well supported by psychological barriers at 0.9000. It now looks as though the market could be looking to carve a fresh higher low, and we will be looking for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should then accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.

--- Written by Joel Kruger, Technical Currency Strategist for DailyFX