Focus Shifts to Bank of England Minutes; Hawks Feeling More Confident
Tuesday’s topside failure in the Euro above 1.4200 and ahead of critical resistance from November 2010 at 1.4280 could be warning of some form of a top, with a break back below Tuesday’s low already helping to strengthen this case. However, this market seems to continuously be well bid on any form of a dip, and we would need to see a bearish daily close on Wednesday to be able to talk more seriously about a reversal.
We have been seeing some profit taking in the Euro over the past few hours with a rumor that AIB missed a payment and uncertainty over the upcoming Portuguese austerity measures vote weighing on the market. But as we mentioned above, the market is still showing very well bid on dips, with reported demand from sovereign accounts.
Geopolitical developments have been less risk favorable with protests scattered throughout the Middle East, nuclear threats lingering in Japan, and the allied military operation in Libya still garnering attention. However, overall, things appear to be stabilizing, and the latest reports and speculation of a Gaddafi exit could help to offset some of the negative risk sentiment.
Looking ahead, the key event risk for the day comes in the form of the Bank of England Minutes due at 9:30GMT. While the central bank remained on hold at the previous rate decision and doves still retained control, there has definitely been a notable shift in favor of the hawks. The previous Minutes revealed a 6-3 split, with Spencer Dale joining on the hawkish side and voting for a rate hike along with Martin Weale and Andrew Sentance (ultra-hawk for 50bps).
Should we see any more indication of a move more towards the hawkish side today, we would expect to see relative outperformance in the Pound, with the latest CPI data further justifying and confirming the hawkish shift. Nevertheless, despite the hawkish shift and higher inflation data, we still side with the dovish camp and feel that the Bank of England should still prioritize the shorter-term recovery over any longer-term inflationary pressures. US equity futures and commodity prices are tracking mildly lower on the day thus far.
EUR/USD: The market remains very well bid with the latest surge back above 1.4000 opening the next upside extension towards key resistance from November 2010 at 1.4280. Look for a test of this level over the coming sessions, while ultimately, only a break and daily close back below 1.4140 would take the immediate pressure off of the topside.
USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.
GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. As such, we would warn that the latest rally above the figure should be met with reservation, as the market could once again stall out. In the interim, key short-term support comes in by 1.6290, and a break and close back below this level will be required to relieve immediate topside pressures. However, should we establish a daily close below 1.6290, we would expect to see a downside acceleration towards 1.6000.
USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for an initial break and close back above 0.9100 to relieve immediate downside pressure, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.
Written by Joel Kruger, Technical Currency Strategist
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