GBP Adjust Positions Pre-QIR, CHF-Bears Remain Fragile
| May 13, 2014 07:14AM ET
The FX markets remain ranged, the risk sentiment is positive yet contained due to soft Chinese data released overnight. The fading geopolitical fears (at least on the financial markets side) and better US yields encourage outflows from the Swiss franc and the yen; the EM currencies trade broadly higher versus the US dollar. On the EUR side, the ECB threats keep the bias on the downside. EUR aggressively sold-off as ZEW survey showed deterioration in May expectations in Germany and the Euro-zone. Finally in UK, the sterling trades on mixed sentiment before Wednesday’s unemployment and QIR release.
h3 Big Wednesday for the UK/h3GBP-complex trades in quiet fashion ahead of unemployment and Quarterly Inflation Report due on Wednesday. We do not expect significant shift in BoE’s projections for inflation and growth, Governor Carney should reiterate plans for “gradual and modest” rate normalization by mid-2015. On the other hand, markets bet in favor of rate normalization beginning by end-2014 rather than mid-2015! The UK sovereign curve steepens significantly, the front end is now suspected to have risen too fast (3-month yields reaching 30-month high of 0.471% on April, 6-month yields at almost 2 year highs). There is room for downside correction should Carney re-anchors the rate expectations, especially repeating that house prices are under FPC responsibility.
The confrontation between Carney’s forward guidance and the market optimism shall continue as long as the UK recovery positively deviates from the US’ and the Euro-zone’s. The weekly correlation between EUR/USD and GBP/USD declined to five-year lows, emphasizing the intense market focus on diverging fundamentals in UK / Euro-zone, and the BoE / ECB expectations accordingly.
GBP/USD tests Mar-May uptrend channel bottom in London, the short-term dynamics are mixed while the overall sentiment shows positive bias through market positioning. Any optimism regarding the UK recovery and jobs data, any meaningful positive shift in BoE stance should trigger fresh rally back to year highs (towards 1.7000). However, as we are well aware of Carney’s will to avoid a “too early” rate hike to sustain UK recovery, we expect contained enthusiasm in his public communication.
EUR/GBP extended weakness to 0.81433 (double intra-day low) yesterday and rebounded decently as London walked in this morning. The cross sees support at the 30-day lower Bollinger band (0.81581). Large option related offers trail below 0.81500 for the week ahead.
h3 Swiss franc extends weakness/h3Swiss franc extends weakness against EUR and USD as the market risk appetite is not impacted by Ukrainian tensions. The decelerating safe-haven inflows and improvement in US yields keep CHF-crosses well bid. USD/CHF is now ready to test the 100-dma (0.8896), option bids wait to be activated above 0.8900 for today and tomorrow expiry. Similarly, EUR/CHF tests 1.22152 - Fibonacci 38.2% resistance on Jan-Mar drop. Large vanilla bids are placed at 1.22300/500 today and tomorrow. Yet the 1.22000 is still a fragile support given the overall negative bias in EUR. The short-term technical dynamics suggest the extension of gains on both USD/CHF and EUR/CHF pairs. However the Swiss franc remains firmly subject to geopolitical risk and a potential sudden turn in market risk sentiment.
2014-05-13T12:30:00 USD Apr Retail Sales Advance MoM, exp 0.40%, last 1.10%, rev 1.20%
2014-05-13T12:30:00 USD Apr Retail Sales Ex Auto MoM, exp 0.60%, last 0.70%
2014-05-13T12:30:00 USD Apr Retail Sales Ex Auto and Gas, exp 0.50%, last 1.00%
2014-05-13T12:30:00 USD Apr Retail Sales Control Group, exp 0.50%, last 0.80%
2014-05-13T12:30:00 USD Apr Import Price Index MoM, exp 0.30%, last 0.60%
2014-05-13T12:30:00 USD Apr Import Price Index YoY, exp 0.30%, last -0.60%
2014-05-13T14:00:00 USD Mar Business Inventories, exp 0.40%, last 0.40%
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EUR/USD is trying to stabilise after its recent sharp decline. Resistances for a short-term rebound are given by 1.3812 (02/05/2014 low) and 1.3871 (intraday high, see also the 50% retracement). An hourly support now lies at 1.3745 (09/05/2014 low), while a key support stands at 1.3673 (see also the rising trendline). In the longer term, EUR/USD is still in a succession of higher highs and higher lows. However, the recent marginal new highs (suggesting a potential long-term rising wedge) indicate an exhausted rise. A break of the key support at 1.3643 (27/02/2014 low) is needed to confirm a long-term bearish trend reversal.
GBP/USD has weakened near the major resistance at 1.7043. Monitor the support at 1.6823 (02/05/2014 low), as a break would suggest persistent selling pressures. On the other hand, a break of the hourly resistance at 1.6916 (intraday low) would alleviate the short-term selling pressures. Another resistance lies at 1.6996, whereas another support can be found at 1.6763. In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6661 (15/04/2014 low) holds. However, we are reluctant to suggest an upside potential higher than the major resistance at 1.7043 (05/08/2009 high), especially given the general overbought conditions. Another resistance can be found at 1.7332 (50% retracement of the 2007-2009 decline).
USD/JPY has bounced close to the key support area between 101.20 (03/03/2014 low) and 100.76 (see also the long-term rising channel). The break of the hourly resistance at 102.01 has validated a short-term base formation. Resistances are given by the declining trendline (around 102.64) and 103.02. An hourly support now lies at 101.85 (intraday low). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.09) and the rising trendline from the 93.79 low (13/06/2013). A major resistance stands at 110.66 (15/08/2008 high).
USD/CHF has moved sharply higher after the successful test of the key support at 0.8699. Prices have thus far succeeded in staying above the broken resistance at 0.8862, suggesting persistent buying interest. A key resistance stands at 0.8953. Hourly supports can be found at 0.8841 (02/05/2014 high) and 0.8802 (intraday low). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. However, a decisive break of the key resistance at 0.8930/0.8953 is needed to validate a bullish reversal pattern.
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