Sterling Weighed Down by Dovish BOE Report

MORNING SLICES

FUNDYS
 

A mild correction in the markets is underway, with traders content in buying back into currencies and risk on Tuesday. However, it remains to be seen whether yesterday’s market reversal is now complete in favor of a fresh bout of consolidation, or whether we will continue to see additional corrective activity resulting in additional USD declines. After benefiting strongly from the latest rebound, Kiwi is back under some pressure today after FinMin English was out expressing concern over the strength of the local currency and its potential detrimental impact on the economy. In Australia, Westpac consumer confidence came in on the softer side, but on the year still managed to hold well into positive territory. Meanwhile in Japan, core machinery orders were stronger, while inflation was seen inching higher.

Relative Performance Versus USD on Wednesday (As of 11:00GMT) –

1)    CAD              +0.08%
2)    YEN               +0.06%
3)    SWISSIE      +0.04%
4)    EURO            -0.07%       
5)    KIWI              -0.14%
6)    AUSSIE         -0.15%   
7)    STERLING    -0.25%

There has been talk of a rescue plan for Greece from the Eurozone countries and many market participants will be watching closely to see how things play out. Over the past several weeks there has been a heated debate on whether to help the distressed Greek economy, with many coming out voicing a strong disapproval for any form of intervention on behalf of Greece. Nevertheless, it seems as though the threat of a spillover from Greece into other Eurozone economies may be too much to burden, and as such, a viable rescue plan is becoming all the more realistic. According to various sources, a statement on Greece could be issued at tomorrow’s EU leaders summit.

European data has been all about the UK and Scandi region with industrial production coming in much stronger in the UK, and Sweden, while Norwegian inflation has come out firmer. Meanwhile, the Bank of England Quarterly Inflation Report has also been released to somewhat offset initial Sterling strength after BOE King says that it is far too soon to conclude that no more bond buying is needed. King has also added that there is significant slack in the economy that will dampen prices. All in all, an undeniably dovish statement that has inspired fresh sell interest. Elsewhere, ECB Mersch was out saying that a combination of high unemployment and growth that is below potential should keep inflation in check. Mersch also goes on to stress that a prolonged period of excess liquidity should not be underestimated or unwelcome developments in specific asset classes.

Looking ahead, US MBA mortgage applications are due at 12:00GMT, followed by the US trade balance (-35.8B expected) and Canada international merchandise trade (-0.2B expected) at 13:30GMT.  The US monthly budget statement is then released later in the day at 19:00GMT. On the official circuit, Fed Chair Bernanke and Treasury Secretary Geithner testimony is set for release at 15:00GMT, while Fed Plosser speaks in Philadelphia at 17:45GMT. US equity futures point to a higher open, while commodities are mildly bid.
 

GRAPHIC REWIND

TECHS
 

EUR/USD It is difficult to determine where we go from here in the short-term, with the market correcting from oversold levels on Tuesday before stalling out by the 10-Day SMA (just over 1.3800), which seems to be offering itself as a solid form of resistance over the past several days. We retain a bearish bias and would look for the 10-Day to once again cap ahead of some consolidation and an eventual renewed bout of weakness through 1.3585. A close back above the 10-Day SMA would however delay and open the door for additional corrective gains potentially towards 1.4200 before bearish resumption.   

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 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 a risk for additional corrective gains before any renewed weakness. The 10-Day SMA comes in by 1.5800, and we would expect to see any rallies well capped by the latter in favor of a bearish resumption. Only a close back above the 10-Day would delay outlook. 

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 towards 1.0800, a short-term corrective pullback and consolidation can not be ruled out. Nevertheless, we would look to use any dips into the 1.0500 region as a formidable opportunity to build on existing longs in anticipation of a fresh higher low.

 

FLOWS
 

Fix related selling in Eur/Gbp. Technical accounts looking at the Ichimoku Cloud base in Usd/Jpy. Semi-official and Reserve Manager selling in Aussie.

 

TRADE OF THE DAY
 

No Trade: All is quiet right now and difficult to determine short-term market direction Will stay on the sidelines.

PORTFOLIO OVERVIEW
 

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