USD/JPY Rally, UK Q1 GDP Flat
Swissquote Bank Ltd | May 28, 2015 05:52AM ET
Forex News and Events
More upside in JPY
Japans retails sales rebounded to 0.4% m/m after a concerning collapse of -1.8% the prior month. However, the recovery was still below estimated of a 1.1% increase. Events have aligned to push the USD/JPY higher. On the USD front, US data positive momentum has now started to support the Fed’s theory of transitory economic weakness. Solid core durable goods combined with hawkish Fed members’ comments should be evidence to USD bulls that a September rate hike remains on the table. In Japan, minutes from the BoJ monetary policy committee meeting indicates that the current rate of expansion remains appropriate. In addition, Chief Government Spokesman Suga delivered with semi-official approval of yen weakness, by stating that JPY decline has not reached undesirable levels. In our view, the USD/JPY remains the most direct way to trade the global policy divergence theme. News emulating from Japan should motivate carry traders to further use JPY to fuels their yields seeing ambitions, extending bullish momentum to 126.
GBP Referendum shadow
Today, UK Q1 GDP has printed at 0.3% q/q. It has not been revised higher as it was anticipated to go to 0.4% q/q from 0.3% q/q first estimate. The increase in the anticipation was likely due to positive contributions from investment and domestic consumption. Britain has relied on domestic demand for its economic recovery as the strong GBP vis-à-vis the EUR, has hurt competitiveness. The weak trade performance has pushed up Britain's current account deficit to its highest levels on record. Yesterday, the Queen’s speech outlined policies of the new Conservative-majority government including the biggest elephant in the room, the EU referendum. The Queen’s speech stated that Britain will hold an in or out referendum on its EU membership before the end of 2017. An earlier report that the referendum would be held in 2016 looks to have been incorrect (although there are no hard timelines yet). Business leaders have been vocal that the uncertainty caused by the EU referendum has slowed investment inflows. With opinion polls suggesting that UK voters would back staying in the EU, eliminating major disruption, a quick resolution would have been a positive for UK businesses. Now the GBP will be sensitive to any comments or polls. In addition, there is a growing sense that Scotland is drifting away, further creating uncertainty for the UK’s future.
Strong USD
We remain committed to a September Fed rate hike. The weak data and dovish Fed had tested our resolve but there are now signs September lift off is likely. Last week’s CPI inflation report where core increased by 1.8% indicates that the economy is still humming along. Capacity pressure on the labor market is building and it’s only a matter of time before we see wage growth. Then we got verbal support from Chair Yellen. An unusual hawkish Yellen stated that “it will be appropriate at some point this year to take the initial step to raise the federal funds rate”. Investors needs to come to terms with the new lower normal for US growth especially considering the weaker global climate. With the US the nearest to steadily creating inflation they are the most likely to increase interest rates. We remain bullish on USD as we head towards September.
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The Risk Today
EUR/USD has bounced on the short-term rising trend-line and increased towards the hourly resistance at 1.0940 (26/05/2015). Support lies at 1.0820 (27/04/2015 low) and stronger hourly resistance can be found at 1.1217 (19/05/2015 high). In the longer term, the symmetrical triangle from 2010-2014 favors further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest
GBP/USD is trading between the hourly resistance at 1.5437 (27/05/2015 high) and the support at 1.5302 (27/05/2015 low). The shortterm structure suggests a decline of the pair. In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
USD/JPY is currently breaking all the resistances and is now targeting new resistance broken the key resistance at 125.69 (12/06/2002 high). The pair is still bullish as we stay largely above the 200-dma. Hourly support is given at 121.45 (25/05/2015 low). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).
USD/CHF has erased the mid-term declining channel at 0.9498 and stays below this level. We target the supports at 0.9287 (22/05/2015 low). Resistance can be given at 0.9573 (29/05/2015 high) and stronger support is at 0.9072 (07/05/2015 low) In the long-term, there is no sign to suggest the end of the current downtrend. After failure to break above 0.9448 and reinstate bullish trend. As a result, the current weakness is seen as a counter-trend move. Key support can be found 0.8986 (30/01/2015 low).
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