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British Pound Out of Room and Facing Trial by Event Risk

British Pound Out of Room and Facing Trial by Event Risk

2014-07-23 03:22:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Performance Not as Robust as EURUSD Insinuates
  • Euro Tumbles As European Equities Rally
  • British PoundOut of Room and Facing Trial by Event Risk

Dollar Performance Not as Robust as EURUSD Insinuates

The world’s most liquid currency cross EURUSD made a significant break this past session. Breaking through the 1.3500-floor that kept the bears at bay since its dramatic reaction to the June ECB rate decision on June 5, this looks at first blush like a serious coup for the greenback. Yet, the currency’s broader performance doesn’t bear the weight of the bulls’ run just yet. Through the past session, the dollar lost ground versus its Aussie counterpart and was virtually unchanged against the Yen, Pound and Canadian dollar. For those keeping track of the technical boundaries, the Dow Jones FXCM Dollar Index (ticker = USDollar) was unable to surpass 2014’s moving bearish guide at 10,450 and even the heavily EURUSD-weighted ICE DXY Index found itself short of this year’s 81 high.

From the fundamental landscape, there wasn’t much to inspire the dollar to charge higher. The ‘risk’ barometer moved further away from the extreme readings usually associated to a rally for the currency. In fact, the S&P 500 moved back within striking distance of a fresh record high and the capital market volatility measures eased further back from last Thursday’s peaks. In the absence of a sentiment-motivated bid for the safe haven, there was serious potential from the June consumer inflation (CPI) figures. This data series puts the pressure on the Federal Reserve to recalibrate monetary policy and consider the timing for a return to hikes. Yet, the stress wasn’t particularly high in this round of data. The headline annual figure held at 2.1 percent – notably above their target – while the core measure unexpectedly ticked lower to 1.9 percent. Outside of the dollar’s response, 2-year Treasury yields sunk 3.7 percent and the December 2015 Fed Fund futures were little changed. While there are other events scheduled this week, the gravity of next week’s FOMC decision, NFPs and 2Q GDP may keep the dollar anchored.

Euro Tumbles As European Equities Rally

Next to the Swiss Franc, the Euro was the worst performer amongst the majors this past session. That said, its stumble began before the heavy-hitting news and data started to cross the wires. From the calendar, the Eurozone 1Q government debt numbers increased for the first time in three quarters to 93.9 percent of GDP. Taking the more geopolitical route, the European Union Finance Ministers announced they would expand their sanctions against Russia. What comes as greater surprise is that the currency was retreating while local equities posted substantial gains between 1 and 2.2 percent. The region’s financial stability wasn’t called into question. Meanwhile, the Eurozone government bond yields ticked higher (demand eased), though with little conviction. We need to monitor this prominent EURUSD break for conviction.

British Pound Out of Room and Facing Trial by Event Risk

GBPUSD is facing an impending breakout – a break of necessity. The pair is currently facing a price range of around 40 pips while its average daily range over the past month (20 trading day ATR) is over 60 pips that will put speculators on edge for moves that look to resolve this pressure and could consequently spark a larger move and a surge in volume. In the forthcoming trading session, we have three events that could stoke the pound’s most pressing interests: interest rate expectations. Set for simultaneous release, the BBA home loans data takes on increased prominence with officials’ warnings about the sector growing overheated; while the BoE minutes will directly shape the central bank’s bearings. A little later, BoE Governor Carney is scheduled to speak. Perhaps he will state further surprise of market rate-speculation…

New Zealand Dollar Coils before Heavily-Anticipated RBNZ Hike

Heading into the upcoming RBNZ rate decision (due at 21:00 GMT), there is an incredible level of certainty. Of the 15 economists polled by Bloomberg, 14 expect a fourth 25bp hike to 3.50 percent. The market itself is pricing in an 85 percent probability of a similar move according to swaps. That is a heavy speculative lean…and yet the New Zealand dollar hasn’t generated much progress from this hawkishness. In fact, the currency has gained little to no ground against many of its counterparts since the first hike. So what happens if they decide to hold?

Australian Dollar Advances as Core Inflation Heats Up

When will the RBA hike rates again? Over a long enough time line, tightening is inevitable, but for this theme to be a proactive driver for the currency, there needs to be some degree of confidence where speculators can grab on and its timeframe needs to be considered competitive. Given the currency’s sluggish performance these past few years and the fact that its rate is still the second highest among the majors as is, it is particularly sensitive to speculation of hikes. So, when the core CPI reading hit a four-year high 2.9 percent, there was a spark.

Emerging Markets Gap to 18 Month High, Ruble Climbs Despite EU Sanctions

The US equity indexes were unable to set fresh records, but the MSCI Emerging Market ETF logged an impressive performance gapping to an 18-month high. The bond index for the group similarly advanced to fresh highs. For the currency group, the day’s performance was split. The more thinly traded EM currencies lost ground, but the larger units were green and led by the Russian Ruble’s 0.7 percent advance.

As Rate Expectations Grow, Gold Will Struggle

US inflation figures gave limited impetus to extend rate hopes to the dollar as they attempt to time the Fed’s first move back into hawkish territory. Though while the pressure is not imminent, it is definitely building. And that is what we are seeing in the UK, Japan, Australia and others. As the onus of rate hikes grows, gold’s appeal diminishes. Up next, traders will be watching the UK data set.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

AUD

Skilled Vacancies (MoM) (JUN)

-1.3%

Reflects changes in Australia’s skilled job market

1:30

AUD

Consumer Prices Index (QoQ) (2Q)

0.5%

0.6%

Inflation figures are an important mandate of most central banks today and are a great driver of monetary policy expectations. Higher than expected numbers increase speculation of a rate hike by the nation’s central bank.

1:30

AUD

Consumer Prices Index (YoY) (2Q)

3.0%

2.9%

1:30

AUD

CPI RBA Trimmed Mean (QoQ) (2Q)

0.6%

0.5%

1:30

AUD

CPI RBA Trimmed Mean (YoY) (2Q)

2.7%

2.6%

1:30

AUD

CPI RBA Weighted Median (QoQ) (2Q)

0.7%

0.6%

1:30

AUD

CPI RBA Weighted Median (YoY) (2Q)

2.7%

2.7%

6:45

EUR

French Business Survey Overall Demand (JUL)

7

Economic indicators from the Eurozone are currently being observed carefully for any signs of growth

6:45

EUR

French Production Outlook Indicator (JUL)

-19

8:30

GBP

BBA Loans for House Purchase (JUN)

41757

Loan growth represents demand for housing

9:00

EUR

Euro-Zone Government Deficit (1Q)

Higher than expected deficits weigh negatively on an area’s currency as the government is expected to fund the deficit by raising additional debt

10:00

GBP

CBI Reported Sales (JUL)

16

4

Again an indicator that covers a vast number of sectors and represents economic changes

11:00

USD

MBA Mortgage Applications (JUL 18)

-3.6%

Represents change in demands for loans to buy houses

12:30

CAD

Retail Sales (MoM) (MAY)

0.5%

1.1%

Measure of consumer confidence within an area; important mandate of central banks

12:30

CAD

Retail Sales ex Autos (MoM) (MAY)

0.3%

0.7%

14:00

EUR

Euro-Zone Consumer Confidence (JUL A)

-7.5

-7.5

Currently it is been carefully followed for any signs of an economic recovery

14:30

USD

DOE U.S. Crude Oil Inventories (JUL 18)

-7525K

Higher than expected inventories tend to drop oil prices as supply exceeds demand

21:00

NZD

Reserve Bank of New Zealand Interest Rate Decision

3.50%

3.25%

Interest rate decisions and forward monetary policy guidance are the most closely watched announcements for the near future value of the corresponding currency

22:45

NZD

Trade Balance (New Zealand dollars) (JUN)

150M

285M

The Trade Balance determines change in demand of a currency, and is consequently tracked closely by traders

22:45

NZD

Exports (New Zealand dollars) (JUN)

4.25B

4.60B

22:45

NZD

Imports (New Zealand dollars) (JUN)

4.05B

4.32B

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (JUN)

-1122B

-862B

A net trade deficit signifies an important trend within a region – the imports are higher than the exports.

23:50

JPY

Merchandise Trade Balance Total (Yen) (JUN)

-665B

-909B

23:50

JPY

Merchandise Trade Exports (YoY) (JUN)

1.0

-2.7

23:50

JPY

Merchandise Trade Imports (YoY) (JUN)

8.4

-3.6

GMT

Currency

Upcoming Events & Speeches

1:20

AUD

RBA’s Low Speaks at RMB Internationalization Round Table

1:30

JPY

BoJ's Hiroshi Nakaso Speaks on Japanese Economy

8:30

GBP

Bank of England Minutes

11:30

EUR

ECB Executive Board Member Praet Speaks on Lithuania

11:45

GBP

BOE Governor Carney Addresses Business Audience in Glasgow

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

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.9418

2.1289

10.6645

7.7501

1.2466

Spot

6.6888

5.4511

6.1665

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3750

1.7247

102.19

0.8930

1.0692

0.9524

0.8822

139.83

1345.75

Res 2

1.3732

1.7223

102.04

0.8917

1.0679

0.9508

0.8806

139.61

1340.98

Res 1

1.3714

1.7199

101.89

0.8904

1.0665

0.9492

0.8789

139.40

1336.21

Spot

1.3679

1.7152

101.59

0.8878

1.0639

0.9460

0.8756

138.97

1326.67

Supp 1

1.3644

1.7105

101.29

0.8852

1.0613

0.9428

0.8723

138.54

1317.13

Supp 2

1.3626

1.7081

101.14

0.8839

1.0599

0.9412

0.8706

138.33

1312.36

Supp 3

1.3608

1.7057

100.99

0.8826

1.0586

0.9396

0.8690

138.11

1307.59

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

Sign up for John’s email distribution list, here.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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