ASIA/EUROPE FOREX NEWS WRAP
The European currencies are in focus this morning after another strong sell-off yesterday, which saw the GBPUSD trade below $1.5000 and the EURUSD fall below $1.3000. Of course, the gravitational pull of the Bank of England and the European Central Bank policy meetings has had a large influence on price action this week, considering that both central banks are in the precarious position of needing to loosen monetary policy at a time when it may be in opportune.
With respect to the British Pound, the most recent BoE meeting Minutes showed a divided Monetary Policy Committee, as the majority of the board revolted against Governor Mervyn King (6 to 3) and his desire to inject further liquidity into the economy (£25B at the previous meeting). But more QE may not be helpful policy: the BoE’s Asset Purchase Target is already £375B; inflation runs higher than the BoE’s target of +2.0% y/y, at +2.7% currently; and growth remains low at an annualized rate of +0.3%. Forecasts are divided, but the consensus leans towards no expansion of QE. If there is, it will be a meager £25B expansion. In either case, given the economic troubles facing the country, the GBPUSD remains a sell in my opinion.
The ECB Rate Decision is a different animal. The past several days as the EURUSD has fallen, Italian bond yields have compressed dramatically – quite an unusual occurrence. In my opinion, this suggests one of two things: a 25-bps cut in the main rate; or new provisional liquidity measures setup to deter investors from panicking in the post-Italian election world. This second outcome would result in the ECB reversing its recent balance sheet contraction, undercutting essentially the only source of the Euro’s strength in recent months, the LTRO repayments. I’m expecting both the growth and inflation forecasts to be downgraded.
Taking a look at European credit, peripheral yields are mixed as market participants eagerly away the ECB Rate Decision and ensuing press conference today. The Italian 2-year note yield has increased to 1.174% (+0.2-bps) while the Spanish 2-year note yield has increased to 2.269% (-3.8-bps). Similarly, the Italian 10-year note yield has decreased to 4.633% (-1.5-bps) while the Spanish 10-year note yield has decreased to 4.940% (-3.9-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:10 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.58% (-0.09% past 5-days)
See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change as the pair consolidates near its 2013 low ahead of the ECB Rate Decision today: “The pair has broken the major uptrend off the July and November lows, breaking at 1.3200/20 yesterday, leading to a cataclysmic sell-off into the January swing lows at 1.2995/3035. Although the EURUSD is near oversold conditions, we note that momentum amid political distress tends to supersede RSI. If 1.2995 breaks, a move into 1.2875 and 1.2660 shouldn’t be ruled out.”
USDJPY: I’ve maintained: “The Bull Flag turned out to be a topping pattern, with the 92.30-94.80 range breaking to the downside. Now, with momentum heading lower, and significant event risk on tap, further selling into 90.00/20 would not be a surprise. Barring a collapse in Treasury yields (specifically, the 2s10s spread), the USDJPY remains a long-term buy.” Treasury yields have not collapsed; and US equity markets have moved towards all-time highs. The USDJPY has not confirmed this price action, however; and with the USDJPY above its 8- and 21-EMAs, I’m neutral for now, though close to becoming bullish.
GBPUSD: I maintain: “Selling persists amid weak data, a dovish and divided Bank of England, and the United Kingdom losing its revered ‘Aaa’ rating...With the ascending trendline off of the 2009 and 2010 lows breaking, as well as the 2010 to 2013 range bottom lows breaking near 1.5300, my bias is to sell rallies.” Like the EURUSD, the GBPUSD is consolidating just near its 2013 lows, but has failed at its 8-EMA as it has for the past several weeks, suggesting that the next leg lower may be on the verge of occurring.
AUDUSD:The AUDUSD fell into the 1.0330/75 area on Monday, that I’ve been calling for several weeks, and now a bounce has a materialized back into the descending trendline off of the January 22 and February 20 highs, at 1.0250/70 today. However, the daily RSI remains capped below 50, as it has been during the duration of the downtrend. Now would be the time to look short again; however, a break of this RSI barrier, and a daily close above 1.0250/70 would negate the near-term bearish bias. The next level to look higher towards would be 1.0340/80 (mid-February swing highs); a continuation lower eyes a move towards 1.0090/1.0120, then 1.0000.
S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”
GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”
--- Written by Christopher Vecchio, Currency Analyst
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