FX Market Set to Digest BOE/ECB Event Risk

MORNING SLICES

FUNDYS
 

The Euro, and certainly currencies in general have received a much needed boost following the news on Wednesday of Greece’s fresh austerity plan of Eur4.8B. The EU, ECB, and rating agencies have all welcomed the new plan and are seemingly encouraged with the prospects of the mitigation of a potential disaster. Nevertheless, there is still a lot of uncertainty, and it remains to be seen whether the relief rally on the back of this news can be sustained.

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

1)    CAD              +0.26%
2)    YEN               +0.11%
3)    EURO            -0.07%
4)    STERLING    -0.09%       
5)    SWISSIE       -0.12%
6)    AUSSIE         -0.32%   
7)    KIWI              -0.59%

Interestingly enough, we have been seeing some reversals in many of the beaten down crosses, with notable bounces in the normally uncorrelated Gbp/Aud and Gbp/Jpy on Wednesday. Generally, the move higher in Gbp/Aud is reflective of a rise in risk aversion, while the push higher in the Yen cross reflects increased investor risk appetite. So here too, it remains to be seen how things play out. However, we could see a situation where both crosses find a way of rallying on the back of alternative themes specifically relating to local UK fundamentals.

Key data released thus far on the day includes a slightly better than expected Australian trade balance (but this has hardly factored into price action), a much weaker UK Halifax price showing, and an as expected Eurozone GDP. Elsewhere, the Shadow Times MPC has come out with an unsurprising decision to leave rates and QE on hold. On the official front, SNB Jordan has been with little impact on FX rates after saying that additional FX intervention from the central bank would be contingent on market conditions.

Looking ahead, all eyes now turn to the highly anticipated event risk in the form of the respective Bank of England (0.50% unchanged expected; 200B QE unchanged expected) and European Central Bank (1.00% unchanged expected) rate decisions at 12:00GMT and 12:45GMT respectively. While rates are expected to remain on hold in both the UK and Eurozone, market participants will be watching closely for any changes in UK asset purchases, or a change in the outlook from ECB President Trichet at his post rate decision press conference at 13:30GMT.

Canada building permits (0.8% expected), US non-farm productivity (6.3% expected), initial jobless claims (470k expected) and continuing claims (4600k expected) are all due out at 13:30GMT. Canadian Ivey PMI (56.0 expected) is then accompanied by US pending home sales (1.0% expected) and factory orders (1.8% expected) at 15:00GMT, with chain store sales capping things off at 15:30GMT. US equity futures and commodities are mildly offered to flat.

GRAPHIC REWIND
 

TECHS
 

EUR/USD Setbacks have stalled for now ahead of  1.3400 (61.8% fib retrace of the 2008-2009 low-highs), and although the overall structure remains bearish, the market looks as though it may be attempting to carve out a short-term base.  However, it is still too difficult to call and the market could just as easily be in the process of a bearish consolidation ahead of the next major downside extension below 1.3440. A break back below 1.3450 will expose a test by next psychological barriers at 1.3000, while a close back above 1.3700 delays and opens the door for some short-term corrective upside.

USD/JPY Currently in the process of chopping around, with the market most recently rolling over after stalling out above 92.00. Nevertheless, our core outlook in the pair is bullish, and we recommend looking to buy into the current dip. Although we did not anticipate a close below 88.50, we continue to see the near-term risks for an upside reversal and will look for the daily RSI dip below 30 to consider establishing a fresh long position. For now, stay sidelined and let things play out.

GBP/USD The most recent bout of bearish consolidation has been broken, with declines below critical psychological barriers by 1.5000 now exposing next psychological support by 1.4500 further down. Daily studies are however oversold, and we would prefer selling into rallies. The 10-Day SMA has more or less capped rallies over the past several days, so we would recommend looking to sell on a rally back towards the shorter-term SMA which currently comes in by 1.5240.    

USD/CHF Continues to press higher with the market now fast approaching our 1.1000 objective from a few weeks back. A major base looks to be firmly in place and any setbacks are expected to be well supported ahead of 1.0600 in favor of a bullish continuation through 1.1000 and towards 1.1500 further up.  Only back under 1.0600 would delay and give reason for pause.

FLOWS

Swiss bank on the bid in Gbp/Usd. Russian account and US investment house buying Eur/Usd. CTAs and leveraged funds selling Aus/Usd and Nzd/Usd. Middle Eastern names on the bid in Usd/Cad.

TRADE OF THE DAY

No Trade: No new recommendations at the moment and currently running open positions in Eur/Aud, Eur/Cad, Gbp/Aud, and Gbp/Jpy. 
 

PORTFOLIO OVERVIEW

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

If you wish to discus this topic or any other feel free to visit our Forum page