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British Pound Faces Heavy Event Risk after Massive Decline

British Pound Faces Heavy Event Risk after Massive Decline

John Kicklighter, Chief Strategist
  • Dollar Drops as Dow Hits New 5 Year High, EUR/USD Climbs
  • Euro Climbs as Investor Sentiment Improves, Bigger Tests Ahead
  • British Pound Faces Heavy Event Risk after Massive Decline
  • Japanese Yen: Officials Back Off Yen Threats, Modestly
  • New Zealand Dollar: Did the RBNZ Governor Enter the Currency War?
  • Swiss Franc Eases as SNB President Maintains EURCHF Focus
  • Gold Falls a Fifth Consecutive Day – Longest Tumble Since January 2011

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Dollar Drops as Dow Hits New 5 Year High, EUR/USD Climbs

Despite a pickup in competitive stimulus talk over the past 24 hours, the dollar still suffered a slip this past session. The greenback dropped against most counterparts through Tuesday and continues to give up ground through the early trading hours Wednesday. That has lead the Dow Jones FXCM Dollar Index (ticker = USDollar) to extend its pullback from Monday’s spike high and threatens to pull the benchmark below 10,300. Despite the shift, bullish appetites wouldn’t be difficult to rouse if the right buttons were pushed. First and foremost is the constant threat of a serious risk aversion move. Should fear undermine the stimulus-sedated and complacent attitude of capital markets, the luxury of seeking an asset that provides both safety and competitive return goes out the window. In that scenario, the market moves to the dollar. That said, the S&P 500 hit its highest level since November 2007. Yet, with a pickup in blatantstimulus threats, we the dollar may firm up even without fear.

Euro Climbs as Investor Sentiment Improves, Bigger Tests Ahead

With a relatively light economic docket and round of headlines this past session, the euro was offering a relatively controlled performance this past session. At the top of the docket was the Eurozone ZEW survey – an investor confidence measure. With tail risk dropping and regional equity indexes recovering ground quickly, the survey offered a hearty jump to its highest reading (48.2) since April 2010. Though, it is worth noting that the current conditions component reported a drop on the month. From the headlines, the only thing of note was a story that Spain may try to sell a bond in dollars next week (diversifying investors) and Italian Prime Minister candidate Berlusconi’s remark that the ECB must back sovereign debt to support the euro. These are interesting but not the market’s primary focus. With stimulus still in focus, the contracting ECB balance sheet still carries the weight of the euro. That means the report of the first LTRO2 repayment on Friday is top event risk.

British Pound Faces Heavy Event Risk after Massive DeclineThe volatility risk over the coming session is exceptionally high for the pound. On tap we have two key pieces of event risk: the Bank of England (BoE) minutes and January employment figures. The first look for the simultaneous release will be to the labor data for the simple reason that they are easier to interpret as a ‘better or worse’ outcome. For an economy that is currently slogging through a triple dip recession, labor figures are essential fundamental measures. The jobless claims change from the previous read gave a boost but the 5,500-person drop in jobless claims expected this go around sets up an opportunity to surprise in either direction. Simplicity aside, the far more important event for the sterling is the central bank report. The sterling has dropped 5.3 percent against the dollar and 6.8 percent against the euro since the beginning of the year on building fears that the BoE will play catch up to its global counterparts and ramp up stimulus efforts. That is a long way to move on conjecture alone. If these minutes don’t offer some hint of vindication, shorts may start pulling back on their exposure.

Japanese Yen: Officials Back Off Yen Threats, Modestly

Despite the firm performance in equity markets, the funding currency / safe haven Japanese yen gained ground Tuesday and continues to push ahead this morning. Once again, policy officials kept the newswires warm and a market that has a serious addiction to stimulus speculation was certainly in the mood to digest everything they had to say. Yet, since the G20 statement, we have seen that the most important policymakers have backed off their explicit effort to devalue their currency. Perhaps most bombastic was Bank of Japan member Morimoto who said the weaker currency was good for exports and that unprecedented easing was on tap for 2014. In contrast, Prime Minister Abe and Finance Minister Aso both remarked that they weren’t considering a foreign bond buying program (a serious stimulus enabling program) or change to BoJ independence laws. The market is hungry for more stimulus news and the yen is oversold. Without fresh stimulus fuel, we may turn.

New Zealand Dollar: Did the RBNZ Governor Enter the Currency War?

Though the Reserve Bank of New Zealand (RBNZ) Governor’s scheduled speaking engagement this morning was supposed to focus on the nation’s currency (the kiwi), there was little expectation that the commentary would draw much in the way of highlights. Yet, Governor Wheeler proved those expectations very wrong. From a policy stance where the central bank has kept a loose threat to raise the benchmark rate somewhere in the vague future, Wheeler took a strong turn by suggesting he was ready to join the currency war that global officials have assured us is not taking place. The assessment that the New Zealand dollar is expensive is nothing new – but in context with the new warning that he was ready to intervene on behalf of the currency should the situation demand it is a serious change. Since this serious red flag was raised, we find the kiwi sharply down Wednesday between a 0.67 percent drop against the Canadian dollar and 1.11 percent versus the yen.

Swiss Franc Eases as SNB President Maintains EURCHF Focus

Swiss National Bank officials must recognize the trouble facing the Eurozone should its economic troubles jump back into the financial realm. Or perhaps they fear the monetary policy officials in its primary trade partner will wisen up and join the stimulus effort to ease pressures at home. Either path would lead to trouble for the Euro and once again drive capital into the comforting arms of the Swiss banking system. SNB President Jordan reiterated his warning Tuesday that the central bank will defend the 1.2000 EURCHF exchange rate with unwavering commitment. We are still trading approximately 350 pips above the imposed floor, but it wouldn’t take much of a shock to once again test the SNB’s commitment.

Gold Falls a Fifth Consecutive Day – Longest Tumble Since January 2011

With equities rising the past session and the G20’s vow not to target exchange rates still resonating across the markets, gold found itself under pressure. While the metal’s 0.3 percent drop Tuesday was rather modest, it extended a five day decline – the longest such move since January 7, 2011. Playing the equal to this bearish consistency, we find gold has closed at its lowest level since August 15. Yet, despite the progress made, we still find the market unable to overtake the $1,600 level. It may seem just temporary road block for such a persistent bear wave dating back to the $1,800 turn in early October, but further progress is growing increasingly reliant on fundamental encouragement. On that front, with South Korea and New Zealand stirring the currency war fears and Japan moving head-first towards stimulus; gold may find a floor.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Wage Cost Index (QoQ)

0.8%

0.7%

During 01-09/12, wage costs remained at 3.7% (YoY) while decreased on quarter. Lower wage inflation may prompt rate cut.

0:30

AUD

Wage Cost Index (YoY)

3.4%

3.7%

4:30

JPY

All Industry Activity Index (MoM)

1.6%

-0.3%

Mild volatility with no signs of notable improvement.

7:00

EUR

German Producer Prices (MoM)

0.3%

-0.3%

(YoY) prices were slightly highly on 12/12; (MoM) prices showed large volatility.

7:00

EUR

German Producer Prices (YoY)

1.2%

1.5%

7:00

EUR

German Consumer Price Index (MoM)

-0.5%

-0.5%

The overall austerity environment in Eurozone has weighted on Germany (YoY) CPI since 2011.

7:00

EUR

German Consumer Price Index (YoY)

1.7%

1.7%

9:30

GBP

Jobless Claims Change

-5.5K

-12.1K

1 yr. avg. at -2.97K; high of 7.3K on 01/12; low of 14.2K on 08/12.

9:30

GBP

Claimant Count Rate

4.8%

4.8%

Has remained flat since 07/12.

9:30

GBP

Employment Change (3M/3M)

117K

90K

Has declined sharply from 07/12 until a tepid rebound on 10/12.

9:30

GBP

ILO Unemployment Rate (3M)

7.7%

7.7%

The decline since 07/12 was partially due to lower participation.

9:30

GBP

Average Weekly Earnings (3M/YoY)

1.4%

1.5%

Has showed modest earning growth since 03/12’s low.

9:30

GBP

Weekly Earnings exBonus (3M/YoY)

1.3%

1.4%

Non-financial earnings have declined during 08-11/12.

10:00

CHF

ZEW Survey (Expectations)

-6.9

Positive sentiment since 06/12.

12:00

USD

MBA Mortgage Applications

-6.4%

Subject to seasonal changes.

13:30

USD

Producer Price Index (YoY)

1.5%

1.3%

Implying a mild inflation overall. Rise in food and energy prices outpaced other prices.

13:30

USD

Producer Price Index Ex Food & Energy (YoY)

1.7%

2.0%

13:30

USD

Housing Starts

920K

954K

Low interest rate and undervalued home prices may further support the US housing market.

13:30

USD

Housing Starts (MoM)

-3.6%

12.1%

13:30

USD

Building Permits

920K

909K

13:30

USD

Building Permits (MoM)

1.2%

1.0%

14:00

CAD

Teranet/National Bank HPI (MoM)

-0.2%

-0.4%

Decline in home prices tame concerns over an overvalued Canadian housing market..

14:00

CAD

Teranet/National Bank HPI (YoY)

3.1%

15:00

EUR

Euro-Zone Consumer Confidence

-23.2

-23.9

Has showed improvement in confidence since 11/12.

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-¥645.0B

Demand for JGBs unchanged (EM Amari encouraged more demand for JGBs on Jan 17.)

23:50

JPY

Foreign Buying Japan Bonds (Yen)

-¥261.6B

GMT

Currency

Upcoming Events & Speeches

1:30

JPY

Bank Of Japan Board Member Morimoto Speaks in Kochi

2:30

NZD

RBNZ Governor Wheeler Discusses Currency

9:30

GBP

Bank of England Releases Monetary Policy Committee Minutes

11:00

EUR

Spain PM Rajoy Speaks in State of the Nation

19:00

USD

Fed Releases Minutes from Jan 29-30 FOMC Meeting

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.6280

1.7759

8.8598

7.7541

1.2360

Spot

6.3084

5.5736

5.5367

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3500

1.5556

94.73

0.9308

1.0185

1.0433

0.8542

127.09

146.18

Resist. 2

1.3471

1.5523

94.44

0.9288

1.0168

1.0412

0.8521

126.63

145.72

Resist. 1

1.3443

1.5491

94.15

0.9268

1.0151

1.0392

0.8500

126.16

145.26

Spot

1.3385

1.5426

93.57

0.9229

1.0118

1.0351

0.8459

125.23

144.34

Support 1

1.3327

1.5361

92.99

0.9190

1.0085

1.0310

0.8418

124.30

143.41

Support 2

1.3299

1.5329

92.70

0.9170

1.0068

1.0290

0.8397

123.83

142.95

Support 3

1.3270

1.5296

92.41

0.9150

1.0051

1.0269

0.8376

123.37

142.49

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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