Forex: British Pound, Euro Lifted Ahead of BoE, ECB - Yen Weakness Persists
ASIA/EUROPE FOREX NEWS WRAP
It’s the first Thursday of a new month, and as is the case in most months, the Bank of England and the European Central Bank are readying to announce their respective policy stances for the coming weeks. And yet, while neither central bank is expected to announce any new measures – especially the BoE, which is more or less a sideshow as incoming BoE Governor Mark Carney answers questions (still ongoing, at the time this report was written) in front of the British parliament – both the British Pound and Euro are finding elevation today.
While there’s little reason to interpret Mr. Carney’s message to the various MPs he’s conversing with presently, and the impact on the Sterling, the ECB Rate Decision poses a much more interesting – and more important – dilemma for the Euro.
Although no change in policy is expected, there have been two major storylines around the Euro: the ECB’s balance sheet is shrinking; and many periphery countries’ politicians have chided the high EURUSD exchange rate. By no means will ECB President Mario Draghi address these concerns in context of a policy shift; the emergency, financial aspect of the sovereign debt crisis has been stemmed, meaning that the ECB expects banks to repay emergency loans – the LTROs. These repayments will continue. On the same token, the Euro is not overvalued, according to the most important economy in the region – Germany; just today, the government said that a high EURUSD exchange rate is a sign of confidence and in the region.
Accordingly, we’re expecting more of the same from the ECB – growth remains weak, governments need to do more to address fiscal issues, and the ECB stands ready to support sovereign yields if worse comes to worst. With the EURUSD maintaining its upward trend from January, any dips are viewed as constructive.
Taking a look at European credit, peripheral yields are mixed, but there has been little impact on the Euro. The Italian 2-year note yield has decreased to 1.675% (-0.4-bps) while the Spanish 2-year note yield has increased to 2.806% (+1.2-bps). Similarly, the Italian 10-year note yield has decreased to 4.532% (-4.0-bps) while the Spanish 10-year note yield has decreased to 5.399% (-1.9-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:15 GMT
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “Consolidation occurring after overshoot towards 1.3700; with the daily RSI uptrend breaking, a pullback towards 1.3500 should not be ruled out. I maintain: with the daily RSI well into overbought territory, a pullback would be deemed healthy. Dips into 1.3500 are deemed constructive. Support is 1.3615/20 (weekly R2), 1.3540 (weekly R1), and 1.3500. Resistance is 1.3635/60 and 1.3755/85 (weekly R3, monthly R1).”
USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again. Resistance comes in at 92.00/05 (breaking now) (weekly R1), 93.15/20 (weekly R2), and 93.45/50 (monthly R3). Support comes in at 91.00 and 90.00/10 (weekly pivot, monthly R2).”
GBPUSD: The pair is holding below the 61.8% Fibonacci retracement from the June low to January high, vindicating the “cover on dips, sell rallies” perspective. I continue to look to sell rallies in the pair as significant RSI divergence exists. A hold below 1.5675 eyes a move towards 1.5500, and ultimately, 1.5265/70, the June low. Resistance comes in at 1.5825 and 1.5885/90. Support is 1.5675 and 1.5580 (monthly S1).
AUDUSD:A break below 1.0360 has given way to a move into the November swing low and 200-DMA at 1.0285/310, which could prove to be an area to look for a bounce. However, the daily RSI support dating back to June 2012 is breaking, suggesting that further downside should be sought. Resistance comes in at 1.0360 and 1.0425. Support is 1.0290 and 1.0150.
S&P 500: Tuesday I said: “as indicated on the charts the past weeks, noting “nearing the top 1505/1512” – the top was 1504.6. If this breaks, 1520 is in sight.” Indeed, the irrational exuberance has continued, bringing topline Bearish Rising Wedge resistance in focus at 1512/15; the December 2007 highs of 1520/24 could be reached on an overshoot. Bottom line: I’m expecting a crash in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality.
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 1663 (200-EMA) and 1640/45.
--- Written by Christopher Vecchio, Currency Analyst
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