Forex: Quieter Wednesday Puts Focus on Trends - Eyes on GBP
ASIA/EUROPE FOREX NEWS WRAP
The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has continued to track lower today, mainly due to the continued unwind in USDJPY long positions. The commodity currencies are relatively weaker on Wednesday, as the 4Q’12 Australian CPI report released overnight showed diminishing price pressures, a typical sign of falling consumption. Naturally, this bodes poorly for the Aussie ahead of the Reserve Bank of Australia Rate Decision in two weeks; however, I would consider the strength of the Aussie in the 4Q’12 to be the catalyst for slower inflation, given the recent uptick in Chinese data (which is a positive for the Australian economy).
Although Europe has become a bit of a bore recently – the Euro-zone sovereign debt crisis is in the midst of its twilight phase, right before conditions begin to unwind again – the British Pound has certainly proven more exciting of recent. The UK economy is in the midst of another rough patch, with all indications suggesting that the 4Q’12 GDP release on Friday will show a quarterly contraction (marking a triple-dip recession) and flat growth on the year overall.
With British growth stagnate and fiscal authorities tightening the belt for upwards of twelve months (per Chancellor of Exchequer George Osborne, who suggested a few weeks back that austerity would have to continue for “at least” another year), stimulus, by and large, will have to come from the Bank of England. The BoE January meeting Minutes released today showed an 8-1 vote in favor of keeping the APT on hold at £375 billion; but with yearly inflation running high at +2.7%, more QE seems unlikely at present time. Instead, any stimulus is unlikely until mid-year, when Mark Carney replaces Mervyn King as Governor, which means that further pressure on the Sterling is likely as economic conditions continue to muddle.
Taking a look at European credit, peripheral yields are mostly lower, providing light support for the Euro. The Italian 2-year note yield has increased to 1.445% (+0.7-bps) while the Spanish 2-year note yield has decreased to 2.489% (-1.5-bps). Similarly, the Italian 10-year note yield has decreased to 4.169% (-2.1-bps) while the Spanish 10-year note yield has decreased to 5.057% (-4.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.08% (+0.14% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “the RSI downtrend that was broken last week was the clue for further strength. Accordingly, I maintain that “focus is on buying dips.” It now appears that a Bull Flag has formed on the daily chart, with a break above 1.3400/10 signaling a move towards 1.3485. Support comes in 1.3280/3310, 1.3120/45, 1.3090/95 (50-EMA), and 1.3000 (January low). Resistance is 1.3380/85 (mid-March swing high), 1.3400/10 and 1.3485 (late-February swing high).
USDJPY: The past few weeks I’ve maintained: “the market remains very net-short the JPY, so a near-term top marked by an event seems possible (think the US Dollar bottoming the day after QE3 was announced)).” This is playing out today, with the Yen as the top performer. Resistance comes at 89.10/35, 89.60/70 and 90.10/30 (monthly R2). Support comes in at 88.40 (monthly R1) and 87.00/40 (weekly pivot).
GBPUSD: No change as the pair steadies below its 200-DMA: “The pair has broken below ascending TL support off of the July and November lows at 1.6000. A weekly close below this level could accelerate losses through 1.5900/05 (200-DMA) towards the most recent swing low, at 1.5820/25 set in mid-November. Support is 1.5750 and 1.5825. Resistance comes in at 1.5900/10, 1.6000/10, 1.6070/75 (50-EMA), 1.6180, and 1.6300/10 (post-QE3 announcement high in mid-September).”
AUDUSD:No change: “The pair has broken the December highs and a break signals a push towards 1.0605/25. However, it’s worth noting that the daily RSI hasn’t pushed into overbought territory on any rally since February 2012. Accordingly, we’ll either see a move to new highs and with RSI confirming the breakout; or further consolidation/pullback is in order before the next leg higher. Support is at 1.0530/50 (weekly pivot, monthly R1), 1.0465/70 (weekly S1), and 1.0400/05 (weekly S2). Resistance is 1.0530/85 and 1.0605/25 (August and September highs).” It should be added that a weekly close below 1.0530 could signal a deeper retracement towards 1.0350/400.
S&P 500: Earlier last week I said: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75…Bull Flag is potentially forming on lower timeframes (1H, 4H).” With these levels to the upside breaking, a move above the September highs points to resistance at the 161.8% Fibonacci extension at 1492, 1500 and 1520/25 (December 2007 high). Support comes in at 1470/75, 1450/55, 1425, and 1400.
GOLD: The past few weeks I’ve maintained: "When considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at [1630/40].” The rebound has ensued, with the alternative safe haven rallying up to 1690 today. A daily close above 1700 points towards 1722/25 and 1755. Support is 1675 (20-EMA) and 1640/45.
--- Written by Christopher Vecchio, Currency Analyst
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