Tuesday, July 13, 2010

UK Ratings Back in the Spotlight

Forex Special

Forex News And Events:

Markets continue to trade at their unhurried summer pace with no signs that we’ll encounter any directional momentum today. The highlight of yesterday’s trading day was the BoE MPC Posen addressing comments advanced by S&P regarding the UK’s cherished AAA sovereign rating. S&P asserted that UK debt levels were approaching levels incompatible with their AAA rating. Posen later addressed fears that the UK could fall back into economic recession and further warned that recent austerity measures across the EU could weigh on the UK’s fragile recovery.
Should the UK government fail to develop a concrete strategy, the nation’s risk-free rating could be in jeopardy – something we’ve seen quite a bit of in the EU. As can be expected, the GBP has come under noticeable selling pressure. Sterling continues to struggle with the market’s shifting views on the inflationary path set by the BoE holding rates low and steady for an extended period of time. The ill-timed comments by S&P just exacerbated GBP selling mostly due to apprehension already present in the marketplace.
In the near term, we expect GBPUSD to be sold on any rallies as MPC members fail to follow Sentence’s call to raise rates and the fact that sovereign debt fears will likely cloud any positive developments.
In the Eurozone, recent ECB data demonstrated that the central bank only purchased €1 billion worth of Eurozone bonds as part of its Securities Market program. The figure represents a significant deceleration in bond intervention and potentially signals a quazi-return to normalcy. Portugal was downgraded today by Moody’s to the A1 level with a “stable” outlook for the future. 
Fitches holds Portugal 1 notch above A1 while the S&P relegates the small nation 2 levels below. While the “stable” outlook should calm markets, the initial knee-jerk reaction sent the EURUSD down 25 points. Portugal’s growth is likely to remain weak until structural reforms are implemented and effective.
Lastly, Greece is due to auction off €1.25bn of its own debt today on the open market. Should the rate close below 5%, this would be a positive sign of returning investor confidence and broadly Euro positive.
Daily Forex News

Today's Key Issues (Time In GMT):

08:00 SEK AMV Unemployment rate, % Jun 
08:30 GBP CPI, % m/m (y/y) Jun 
08:30 GBP RPI, % m/m (y/y) 
08:30 GBP RPIX, % m/m (y/y) Jun 
09:00 EUR Germany: ZEW economic expectations index Jul 25.3 exp, 28.7 prior 
12:30 USD Trade balance, $ bn May -40.3 prior 
13:00 USD Richmond Fed President Lacker (FOMC non-voter) 
18:00 USD Treasury budget balance, $ bn -94.3 ('09) prior

The Risk Today:

EurUsd We are still short EURUSD after the rising wedge formation was activated last week (around 1.2650), and thus far the sell-off has played out nicely to touch a low of 1.2543 (albeit a brief touch). As discussed in yesterday’s report, we set a target for this break out at 1.2510-20 (to give some cushion ahead of the 1.2483 support where the pair bounced on 2 & 6 Jul), but there is now good cause to expect further downside is possible. Looking at the hourly chart, there is a head and shoulders pattern being carved out with a neckline approximately 1.2550 (7 Jul low 1.2553), so we would actually look to add to longs on an hourly break below there. The target for this pattern (measured as the height of the head applied to the point of the breakout) should be 1.2390, however given this is only a few pips shy of the 50-day moving average (1.2387) and behind the psychological support 1.2400, not to mention the scene of some previous highs in the last week of June, we would happily take profits early around 1.2420. Should the pair bounce off the neckline on the first attempt, resistance is eyed at 1.2614 overnight highs, 1.2650, 1.2722 (Friday’s high), then 1.2937 (100-day moving average).
GbpUsd After plunging to lows of 1.4949 early in yesterday’s European session (9 pips short of the bearish break-out target), GBPUSD squeezed all the way back up towards its former range floor of 1.5080 –fantastic news for those who left for the weekend early on Friday and missed the break-out first time around. We have added to shorts back up there, and thus far the bearish strategy is paying off well. As noted yesterday 1.4930-40 is a very manageable first target, with further downside easily possible.Next support is eyed at yesterday’s low 1.4949, 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4983. Sellers will almost certainly appear again back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since yesterday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering around the mid-88s for much of the last few sessions, with 88.35-40 acting as a supporting area of buying interest in the interim. As we foresaw yesterday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.35, so we may end up having to settle for a slightly lower take-profit level depending on how the price action plays out. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.61-76 (resistance zone containing the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the smartest choice this week, but watch for progress to slow in the upper echelons of the 1.06-handle. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.

Resistance And Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot


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