Pound Back in Focus With Bank of England Inflation Report On Deck
Markets remain in a state of consolidation following the previous weekly moves and we are waiting to see if the latest USD rally can extend gains, or if this is yet another short-term correction ahead of the next round of currency buying. In the interim, developments on the fundamental front have been rather quiet with the main story still coming out of the Eurozone as EU officials continue to deny the rumors of a Greek debt restructuring. Nevertheless, with all of the talk, market participants have not been able to easily dismiss the rumors and remain somewhat unsettled.
Data out of China overnight has failed to materially influence price action on Wednesday thus far, with risk appetite remaining intact despite some higher inflation and softer retail sales and industrial production out of one of the world’s fastest growing economies. The Australian Dollar which is highly correlated to China, has in fact rallied on the day back above 1.0850 thus far. Meanwhile, both the Yen and Franc are finally starting to show signs of basing, and we could see these currencies start to sell of more aggressively over the coming sessions. We contend that even in a risk negative environment, both the Yen and Franc stand to lose ground with both currencies trading by record highs and due for a major trend reversal. Some softer inflation data out of Switzerland on Tuesday certainly helps our argument.
Looking ahead, the Pound will come back into focus in Wednesday trade with the highly anticipated Bank of England inflation report due out, along with some other key data in the form of UK trade. Other important data releases on the day include German inflation and US trade. On the official circuit, ECB’s Mersch, Bini-Smaghi, Stark, and Orphanides are slated to speak along with Bank of England Tucker and Fed’s Lockhart, Kocherlakota and Pinalto. US equity futures and oil prices are flat while gold tracks moderately higher.
EUR/USD: Setbacks have stalled for now ahead of critical support in the form of the higher low by 1.4155 from 18Apr. At this point, it is difficult to determine whether the market will attempt to retain the underlying bullish momentum and look to establish a fresh higher low above 1.4155, or continue to falter below 1.4155 and force a shift in the broader structure. For now, we would use Tuesday’s range as a short-term directional gauge. A break back above Tuesday’s high at 1.4445 will be needed to encourage bulls, while back below Tuesday’s low at 1.4255 will provide more confidence for bears.
USD/JPY: Despite the latest slide, we continue to retain a constructive outlook for the market so long as it holds above the daily Ichimoku cloud on a weekly close basis. Ultimately, only a sustained break back below the cloud would negate constructive outlook. A break and daily close back above 81.00 would confirm outlook and accelerate gains, with daily studies turning up from oversold levels. In the interim, we remain on the sidelines.
GBP/USD: The latest pullback has now resulted in a test of some rising trend-line support off of the late March lows, and as such, we will stand aside for now to see how the market responds to the trend-line. The 50-Day SMA has managed to support additional declines for now, but a break below would confirm a trend-line break and open deeper setbacks towards 1.6000. Inability to break below the 50-Day would open the door for a resumption of gains initially back towards the 1.6600 area.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close on the weekly and now breaking back above the previous weekly high to end a sequence of consecutive weekly lower tops. Next key resistance comes in by 0.8875 and a break above will further confirm recovery structure and open the door for a move back above 0.9000. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
Written by Joel Kruger, Technical Currency Strategist
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