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Sterling Pounded Following Much Less Hawkish Inflation Report

Sterling Pounded Following Much Less Hawkish Inflation Report

2011-02-16 12:49:00
Joel Kruger, Technical Strategist
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All remains relatively quiet this week as the US Dollar enters a period of consolidation ahead of its next major move. The key question at this point is, in which direction will that be? Certainly any broader USD selling remains well bid on dips as currency gains in Asian and European trade on Wednesday were met with formidable offers.

Relative Performance Versus USD Wednesday (As of 12:45GMT)

  1. AUD +0.28%
  2. CAD+0.23%
  3. EUR +0.16%
  4. NZD +0.13%
  5. JPY -0.02%
  6. CHF -0.06%
  7. GBP -0.48%

Most of the major currencies trade by daily opening levels, with the Pound standing out as the gross underperformer following a much less hawkish than expected Bank of England quarterly inflation report. Despite yesterday’s concerning letter from the BOE governor to the Chancellor, the overall outlook from the Bank of England is that risks to the medium term inflation outlook are still balanced, and that there are some individuals who are getting ahead of themselves with calls for hikes. As a result, Cable dropped off by well over 100 points from its intraday highs and remains under pressure into North America.

Elsewhere, the Swiss Franc underwent some volatility in European trade, with the currency initially finding bids on some hawkish SNB Hildebrand comments hinting at the need to potentially become less accommodative should signs of additional growth emerge. But the Swiss currency could not hold onto gains after the Swiss government announced measures to deal with the unwelcome strength in the local currency. Finally, while the Australian Dollar is slightly higher against the buck on Wednesday thus far, we see risks for weakness ahead, with a Moody’s warning of potential downgrades to the big Australian banks seen weighing over the coming sessions.

Looking ahead, Canada manufacturing shipments (2.5% expected), international securities transactions and leading indicators are all due at 13:30GMT, along with US producer prices (0.2% expected), building permits (565k expected) and housing starts (540k expected). US capacity utilization (76.4% expected) and industrial production (0.5% expected) are then out at 14:15GMT, with some oil and gas inventory data shortly after at 15:30GMT. The Minutes from the latest FOMC meeting round things out later in the day at 19:00GMT.

TECHNICAL OUTLOOK

Sterling_Pounded_Following_Much_Less_Hawkish_Report_body_eur.png, Sterling Pounded Following Much Less Hawkish Inflation Report

EUR/USD:The latest rallies have stalled out well ahead of 1.3860 with the market finding some resistance by an ideal right shoulder top in the mid-1.3700’s ahead of the latest sharp setbacks. From here, the risks are tilted to the downside, with Friday’s break and close back below 1.3570 triggering the H&S topping formation and opening the door for a fresh downside extension towards the 1.3200 area over the coming days. Any rallies should continue to be well capped ahead of 1.3700 with only a break back above the figure to give reason for concern.

Sterling_Pounded_Following_Much_Less_Hawkish_Report_body_jpy2.png, Sterling Pounded Following Much Less Hawkish Inflation Report

USD/JPY: The market continues to remain extremely well bid on dips below 82.00, with the latest surge back above 83.00 really encouraging longer-term recovery prospects and opening the door for a potential break of key topside resistance by 84.50 over the coming days. Longer-term cyclical studies certainly suggest that the market could be poised for a major bullish reversal and we would look for a break and weekly close back above 84.50 to help confirm outlook. A break back below 82.00 would concern, while ultimately, only a back below 81.00 would negate.

Sterling_Pounded_Following_Much_Less_Hawkish_Report_body_gbp2.png, Sterling Pounded Following Much Less Hawkish Inflation Report

GBP/USD: The market looks to have once again found a meaningful top by the 1.6300 barrier, with the latest setbacks resulting in a series of daily lower tops. From here we look for a break and close back below 1.6000 to confirm bias and accelerate declines back towards 1.5750 over the coming sessions. A daily close back above 1.6200 would give reason for concern, while ultimately only back above 1.6300 negates.

Sterling_Pounded_Following_Much_Less_Hawkish_Report_body_swiss1.png, Sterling Pounded Following Much Less Hawkish Inflation Report

USD/CHF: Although the longer-term market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Next key topside barriers come in by 0.9785 and we now look for a weekly close above this level to accelerate gains and open a fresh upside extension back above parity and towards 1.0070 medium-term resistance from December 2010. Any setbacks from here are expected to be well supported ahead of 0.9500.

FLOWS

A German bank has been an aggressive seller in Eur/Usd and spec types are wary of the all cash Sanofi-Aventis purchase of US company Genzyme Corp for $20.1b. A US investment house has led the selling in Cable, macro accounts have been repeat dip buyers and hedge fund demand was seen in Eur/Gbp early.

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Written by Joel Kruger, Technical Currency Strategist

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