GBP/USD Buy Recommendation Issued @1.5490

MORNING SLICES

FUNDYS
 

The markets are starting to show a willingness to correct on Tuesday with most of the major currencies tracking higher against the buck following some sharp setbacks over the past several days. Fed Dudley has been out talking up the US economy after saying that it is in much better shape than a year a go, despite pressures on some of the smaller and medium sized banks. Fed Bullard has also come out on a separate matter that could help to bolster the USD after saying that the discount rate could go up in the near future as the Fed prepares its exit from liquidity programs.

Relative Performance Versus USD on Tuesday (As of 11:30GMT) –

1)    KIWI              +0.91%
2)    AUSSIE         +0.61%
3)    EURO            +0.42%
4)    CAD               +0.41%       
5)    SWISSIE      +0.35%
6)    STERLING    +0.12%   
7)    YEN                -0.37%

Nobel Prize economist Stiglitz is generating some attention on the Greek crisis after saying that Europe should teach a lesson to speculators that have been aggressively selling the Euro by coming out and intervening to shake things up a bit. Elsewhere, according to some local sources, China Power International Development has denied earlier reports that it had signed a coal supply deal with Australia’s Resourcehouse.

In European trade, a batch of German data came out more or less in line with expectations, while UK data was on the whole weaker highlighted by a disappointing trade balance and BRC. This managed to more than offset any positive sentiment from an encouraging RICS released earlier in the day. Overall, despite a modest bout of profit taking on Tuesday, the USD remains bid on dips as concerns over the global economy and specifically within the Eurozone, continues to burden investors.

Looking ahead, US wholesale inventories (0.5% expected) due at 15:00GMT is the only key release on Tuesday in the North American session.  US equity futures are bid, while commodities trade mixed with oil higher and gold flat.

TECHS
 

EUR/USD The 1.3800 objective from the 1.4200-1.4600 consolidation break has now been well exceeded, with the market dropping sharply into the 1.3500’s ahead of the latest minor bounce. While our core view continues to favor additional downside, short-term technical studies are now severely oversold and warrant a much needed and healthy corrective bounce. A break back above 1.3750 would be required to officially trigger a short-term correction, while inability to do so will keep the focus on next downside target by psychological barriers at 1.3500.  

USD/JPY Last Thursday’s violent pullback certainly dents our shift in outlook in which we had been projecting significant upside over the medium-term. However, the market has still not managed to close below 89.00 and it will be interesting to see how things play out from here. In some ways, the recent whipsaw price action makes it a little easier to call. A break back below 88.55 will confirm bearish resumption, while above 91.30 should accelerate gains to the topside and put the constructive outlook back in play. Until then we remain sidelined.   

GBP/USD (See below)

USD/CHF The latest break back above 1.0500 suggests that the market has now carved out a major base that exposes some fresh medium-term upside towards 1.1000 over the coming days. However, given the intensity of the run-up over the past few days from 1.0200 through 1.0700, a short-term corrective pullback can not be ruled out. Nevertheless, we would look to use any dips into the 1.0400-1.0500 region as a formidable opportunity to build on existing longs in anticipation of a fresh higher low.

FLOWS

Model funds buying break of 0.8800 in Eur/Gbp. Option expiries in Usd/Jpy at 88.50, 89.00 and 89.50. Corporate Canada, real money and local demand for Cad. Middle Eastern and Eastern European bids in Eur/Usd.
 

TRADE OF THE DAY

Gbp/Usd: The market has finally taken out the key October lows just over 1.5700 to likely open the door for some medium-term setbacks over the coming weeks. However, daily studies are now looking quite stretched and there is the strong risk for a material corrective bounce before any additional weakness can take place. As such, look for a push back towards the 1.6000 area from where a lower top will carve out ahead of eventual bearish resumption and fresh declines towards critical psychological barriers at 1.5000. A break above 1.5775 is required to take pressure off of downside, while next key short-term support comes in at 1.5500. STRATEGY: BUY @1.5490 FOR AN OPEN OBJECTIVE; STOP 1.5390. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY. POSITION SIZE SHOULD BE 3X TOTAL EQUITY.

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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