The euro reversed its losses in the U.S. trading session to trade above $.127, gaining 1.2 percent from the bounce off a four-month low. EURUSD had bottomed at 1.2641 in early European trading but steadily rose on short covering throughout the day to hit as high as 1.2793. After a sharp decline in the last four days, the single currency was oversold and due for a correction.

Throughout the week the headline news from Europe put the euro under pressure, making investors nervous about Greece and its possible exit from the euro, which may consequently result in contagion and spread to Spain whose banks are very fragile. Yesterday sixteen major Spanish banks were downgraded by Moody’s.

EURGBP gained 0.5 percent on the day to climb to a high of 0.8077.

EURJPY trimmed some losses and bounced off a three-month low from 100.19 to 101.09.

Yen gained against the dollar on safe haven demand, erasing an earlier loss as USDJPY slipped to 79.00, the lowest since February 17.

GBPUSD tracked the EURUSD higher and rose to 1.5836 from a two-month low of  1.5731.

The Australian dollar was flat against the US dollar this Friday, trading the day between $0.9793 and $0.9882, near five-month lows.

The Canadian dollar declined after earlier making its biggest gains of the week versus its U.S. counterpart. The loonie briefly gained following data showing an increase in Canadian inflation. CPI rose 2 percent in April from a year ago, compared with a 1.9 percent gain the prior month. USDCAD fell after the data to 1.0137 but rose again to 1.0222. Falling crude oil prices, a major Canadian export, weighed on the loonie.

Forex News Review – Euro recovers losses, ends week above $1.27; CAD falls on declining oil

Inflation in Canada rose more than expected in April according to a CPI report released on Friday, driven up by higher gasoline prices.

CPI came in at 2.0 percent, up from 1.9 percent in March. However this matches the Bank of Canada’s target rate.

Core CPI, which is the annual core rate that excludes gasoline, some food and other volatile items, rose to 2.1 percent from 1.9 percent. On a monthly basis, total and core inflation rose 0.4 percent from March.

This helped the Canadian dollar gain slightly against the greenback after the data, though only briefly. The loonie is however off four-month lows reached yesterday.

Chief economist at Laurentian Bank, Carlos Leitao said after the data that the data were in line with expectations and leaves the door open for the Bank of Canada to raise interest rates .

Leito said:

“It does keep the door open, if the Bank of Canada at some point decides it should raise interest rates because of financial stability issues, the fact that inflation is at or slightly above target gives them enough reason to do so. It would have been a problem if inflation starts to fall. The Bank would have a hard time raising rates. But with inflation staying at or slightly above target then if they do decide to move for other reasons they can.”

“We expect the Bank to move this year, in December. There will be a rate hike in December followed by another in January 2013. And the reason for those modest rate hikes is purely from a financial stability point of view, not because of inflation and not because the Canadian economy will be so hot that it requires tighter policy, but because the housing market requires some assistance in making sure it does slow down.”

Forex News – Canadian inflation rate rises in April, within BOC target

Elliott wave analysis on EUR/USD; USD/JPY and Natural Gas

Euro extended its decline against the dollar going into the European trading session, falling to a fresh four-month low. EURUSD saw an early bounce to above the 1.2700 level as it would be hard to break the key support level of 1.2600 today. Short-covering ahead of the weekend has contributed to the bounce, seeing the single currency up 0.5 percent during the session.

The economic calendar was light today but euro is vulnerable to headline news from Europe, with Greece and Spain remaining the key drivers behind euro bearishness. Fear of Greece exiting the euro continues to pressure the single currency and will probably continue until more developments from the next elections in Greece in mid-June.

GBPUSD fell to two-month lows of 1.5731 just before the start of the Europe session but was due for a retracement and moved back up above the 1.5800 level. Sterling has been under pressure since the Bank of England earlier this week released a dovish quarterly inflation report and left the door open for more quantitative easing as recent data show that the U.K economic has officially entered a recession.

USDJPY remains on the down-side after the pair plunged over 1 percent on Thursday following disappointing U.S. economic data, reaching a three-month low of 79.12 where it is consolidating. EURJPY bounced off an early three-month low of 100.19 and retraced to 100.99.

AUDUSD fell to its lowest since November 2011in Asian trading, touching 0.9793 and bounced into the European session, gaining 0.8 percent.

Looking ahead, going into the U.S. trading session, there are no important data due on the economic calendar. There will be some focus on the weekend G8 Summit but no economic policy decisions are expected, though U.S. President Barack Obama hopes to promote discussion on steps to resolve the euro zone crisis.

Forex Market Review – Euro bounces above $1.27

Yen has gained strength on the back of the European  debt turmoil leading to safe haven flows to the Japanese currency as the euro and dollar are weighed down. This has caused concern to Japanese Finance Minister Jun Azumi who said on Friday that he is monitoring currency moves with extra care and is prepared to act as appropriate. This hints at readiness to intervene in the currency markets and sell yen to curb its strength.

Azumi further added that speculators were over-reacting after the yen rose to a three-month high versus the dollar and the euro.

Speculation is growing over whether Greece will have to leave the euro zone because its economy won’t survive the fiscal spending cuts needed to bring its public debt under control.

This resulted in the dollar tumbling over 1 percent against the yen on Thursday to hit a three-month low of 79.12 yen while the euro extended its decline into the European trading session on Friday to reach a fresh three-month low of 100.19 yen.

Last October 31, the Bank of Japan intervened in the currency markets when the dollar fell to a record low against yen. The unilateral intervention cost a record 8 trillion yen ($100.6 billion) to halt the surge in yen. A strong yen threatens Japan’s export-focused economy.

Forex News – Japan warns of possible intervention due to yen strength

Euro extended its  decline against the dollar and yen during the Asian trading session, prompted by the crisis in the euro zone. Concerns over whether  Greece may leave the euro zone have led to contagion fears especially since Spain’s banking system is now fragile. Adding to bearish sentiment, Moody’s ratings agency downgraded sixteen Spanish banks.

EURUSD fell to a fresh four-month low of 1.2654.

Meanwhile, EURJPY fell further in Asia to a three-month low of 100.44.

Sterling continues to underperform after Wednesday’s dovish Bank of England quarterly inflation report increased the likelihood of more QE. GBPUSD dropped to a two-month low of 1.5735.

Yen maintained strength in the Asian session , resulting in the Japanese Finance Minister Azumi to comment that the excessive FX moves are undesirable and he is ready to act if necessary  to curb yen strength. USDJPY plunged over 1 percent on Thursday following disappointing U.S. economic data, reaching a three-month low of 79.12 where it consolidated during the Asian session

The Australian dollar fell further against the greenback as weak Asian bourses and soft China housing data dragged on the commodity-linked aussie. AUDUSD slipped to 0.9813, the lowest level since November 2011.

Forex Asia Review – EURUSD slips to new four-month low

EURUSD  Forecast
The EURUSD was still able to maintain its bearish bias yesterday and hit 1.2654 earlier today. There are no changes in my technical outlook. The bias remains bearish in nearest term testing 1.2625 – 1.2586 region as a part of the bearish scenario after broke below the descending triangle and 1.3000. Immediate resistance is seen around 1.2758. A clear break above that area could lead price to neutral zone in nearest term. We haven’t seen significant bullish correction in the last three weeks so any upside pullback now is normal but overall I still prefer to sell on rallies.

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EURUSD Daily Forecast: May 18

EURJPY Forecast
The EURJPY continued its bearish momentum yesterday, bottomed at 100.54 and hit 100.21 earlier today. The bias remains bearish in nearest term testing 99.23. Immediate resistance is seen around 101.00. A clear break below that area could lead price to neutral zone in nearest term but any upside pullback now is normal and as long as stays below 102.00 my overall intraday bias remains strongly to the downside.

GBPJPY  Forecast
The GBPJPY had a significant bearish momentum yesterday, broke below the triangle and hit 124.62 earlier today. The bearish reversal scenario is now confirmed, testing 123.25 in nearest term. Immediate resistance is seen around 125.50. A clear break above that area could lead price to neutral zone in nearest term but as long as stays below 127.00 I still prefer a bearish scenario at this phase.

AUDUSD Forecast
The AUDUSD was indecisive yesterday, but had a strong bearish momentum earlier today hit 0.9794. There are no changes in my technical outlook. The bias remains bearish in nearest term testing 0.9662. Immediate resistance is seen around 0.9870. A clear break above that area could lead price to neutral zone in nearest term but as long as stays below 1.0000 my overall intraday bias remains strongly to the downside.

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Daily Forecast for Crosses: May 18

GBPUSD Forecast
The GBPUSD continued its strong bearish momentum yesterday, broke below the daily EMA 200 after fell below the trend line support as you can see on my daily chart below. The bias remains bearish in nearest term testing 1.5650 – 1.5600 and the bearish reversal scenario is confirmed. Immediate resistance is seen around 1.5850. A clear break below that area could lead price to neutral zone in nearest term but as long as stays below 1.6000 my overall intraday bias remains to the downside.

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GBPUSD Daily Forecast: May 18

USDJPY Forecast
The USDJPY had a significant bearish momentum yesterday, bottomed at 79.12 and still moving below 79.52/35 key support area. This fact postpones the bullish reversal scenario probably retesting the record low at 75.56 in longer term perspective. The bias is bearish in nearest term testing 78.27/50 area. Immediate resistance is seen around 79.52. A clear break above that area could lead price to neutral zone in nearest term but we need a clear break and daily close at least back above 80.00 to give the bullish reversal outlook another chance with a false breakdown scenario.

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USDJPY Daily Forecast: May 18