Tuesday, January 25, 2011

FX Markets Calm Before An Event Filled Week

!! News And Events: !!
There is a definitely a calm before the storm feeling in the FX
markets today. Asian equity markets were mixed and Europe has had a
confusing start. While the news flow over the weekend was broadly
supportive of the EUR (baring the political developments in Ireland) ,
the EURUSD has steadily traded lower on the open. ECB Executive Board
member Stark stated that he 'could imagine the EFSF recapitalizing
banks or buying sovereign debt" however, he slinked away from the
Eurobond issue stating his concern that the new issue would "blur
the responsibility for every government to be held liable for its own

The Eurogroup's Juncker stated that a complete response to the debt
crisis would emerge in a few weeks, and the generally uncooperative
German contingent sounded broadly supportive, stating the German
government wanted to deliver a 'complete package in the next weeks.'
It seems that the market's overall sentiment is that an agreement
will be reached in the near future (despite last week's ECONFIN
meeting lacking any announcement of policy initiatives or difference
in public comments), which has kept the EUR supported. While the EU
officials were publicly parading the impending solution, the WSJ
highlighted the EU inflation story stating 'Trichet Warns Price
Pressure Is Increasing' giving ECB exit theorists further reason to
believe that higher rates are closer then the market has currently
priced in. We still expect further EUR upside when the policy
initiatives are announced, however it seems from the reaction to
Trichet's comments (front end Eurozone interest rates jumped higher)
that we are shifting towards traditional monetary policy drivers such
as growth / inflation dynamics.

On the economic data front, this week UK and US GDP releases stand
out. With an eye popping UK CPI print, traders will be carefully
watching the balance of growth activity (Tuesday's GDP preliminary
q/q 0.5 exp vs. 0.7 prior) to see if the growth environment should
warrant calls for tighter policy. The BoE Governor King has made it
clear that MPC policy will not involve fine tuning, so strong growth
could easily lead to a shift in language and the markets will quickly
begin pricing in a string of rate hikes. On a side note, the other
major UK release will be the minutes from the MPC minutes which
potentially could provide some insight to the members' thinking. In
the US, recent economic data has fueled general optimism about the
recovery and even provided FX traders with the idea that the USD
should be viewed as a growth currency. Friday's GDP is expected to
support expectations with a q/q rise to 3.5 vs. 2.6 prior reading.

However, should the number disappoint similar to the recent retail
sales figures, the greenback might lose its remaining advocates.
That said there is growing concern that the divide between the
republicans and democrats in the US congress has grown so large,
compromise of economic austerity seems unlikely. With fears of the
debt situation diminished in EU (for now) the focus has logically
turned to he US. We have seen no real follow through in rates or FX
prices, but the contentious debate on US debt limits could become the
catalyst. As for today, we suspect that risk correlated trades should
firm as a lack of economic data will have traders focused on the
impending EU agreement.

!! Today Key Issues: !!
* 08:28 EUR German Flash Manufacturing PMI Last 60.7
* 08:28 EUR German Flash Services PMI
* 08:58 EUR Euro zone Flash Manufacturing PMI Last 57.1
* 08:58 EUR Euro zone Flash Services PMI Last 54.2
* 08:58 EUR Euro zone Flash Composite PMI Last 55.5
* 10:00 EUR Industrial Orders Last 1.4 M/M 14.8 Y/Y
* 13:00 Hungary Interest rate announcement, % 6.00 exp , 5.75 prior
* 18:00 EUR German Finance minister Schauble Speaking

!! The Risk Today: !!
*EurUsd* EURUSD is still holding up rather nicely at the start of this
week, and has even nudged to new highs of 1.3647 in the Asian trading
session –breaching the resistance level at 1.3635. The bullish cup
and handle strategy we entered on the break of 1.3330 is therefore in
very good form, some 250 pips in the money on its way to a target of
1.4035. We have decided to set our stop on this position just below
the 2-3 week old trend channel (connecting the 11, 12 & 20 Jan lows),
which now comes in at 1.3515. Clearly the benefit of using this steep
uptrend as a trailing stop is that we can safeguard a very healthy
chunk of the profits made so far; but it does increase the possibility
of getting stopped out prematurely and missing a subsequent move to
the 1.4035 target. There is still quite a way to go until that
ambitious target however, so watch for sellers lurking at 1.3635 (23
Nov high), 1.3785 (22 Nov high), 1.3825 (10-11 Nov highs), and 1.3975
(9 Nov high). Supports are noted at 1.3397 (20 Jan low), 1.3245 (17
Jan low) and 1.3145 (12 Jan high former resistance).Below there we
have a large gap before major support at 1.3085 (the 29 Dec pivot and
13 Jan low).

*GbpUsd* After bouncing off strong support at 1.5835 on Thursday,
GBPUSD has recovered very well; although sticky resistance just above
1.6000 levels have hampered the pair's ability to re-test the 1.6060
highs (printed on 18 Jan). The key resistance levels to watch this
week will be 1.6010-20 (20-21 Jan peaks), 1.6060 (18 Jan high) and
1.6095 (19 Nov high). After that is a long gap until 1.6185 (9, 10 &
12 Nov triple-high). Near-term support still resides at 1.5835 (17 Jan
& 20 Jan lows), but we would not be alarmed to see a deeper correction
to 1.5810 (14 Jan low) or 1.5785 (former resistance now turned
support) –indeed we'd probably see the latter as a good level to
add some more. Our bullish bias might start to wane if we saw a
serious challenge threaten the 1.5718 support (13 Jan low).
*UsdJpy* USDJPY is loitering just within the upper limits of its 2-3
week downtrend channel (trendline currently 82.90), having peeked
higher a couple of times at the end of last week, but not yet managed
to rally cleanly above it. Should another bullish leg higher occur
today, first resistance is the 20 Jan high 83.12, followed by 83.50
(11 Jan high), 83.70 (7 Jan high), and the formidable old range
ceiling from early December at 84.40. This latter level managed to
contain numerous rallies back on 29 Nov, 1 Dec, 2 Dec, 8 Dec, 13 Dec
and 16 Dec –so it's likely to be a stubborn barrier should we
manage to get back up there. On the flipside, if the bulls fail force
a break higher, expect another return to 82.50 levels where the pair
settled on Friday (and indeed bounced again early this morning), with
the possibility of an extended move to 81.70 (4 Jan European/US
session low), 80.95 (31 Dec low), 80.24 (31 Oct low), and the all-time
low from 1995 at 79.75.

*UsdChf* For those playing either the head & shoulders pattern or the
bearish flag pattern on the hourly chart, Friday's sell-off back
towards 0.9550 came as very welcome respite from the short-squeeze a
day earlier. But we are still not out of the woods just yet. The peak
of the squeeze was 0.9687 –identical to the 14 Jan high (and second
shoulder of our head & shoulders pattern), and that level MUST hold
for our two bearish scenarios to succeed. Should the bullish momentum
return to ruin our party, resistance levels above only come in at
0.9784 (11 Jan high), 0.9850 (12-13 Dec highs) and 1.0065 (1 Dec
high). As a reminder of our 2 current short strategies; the first is a
bearish flag pattern with a target around 0.9480, and the second is a
head and shoulders pattern which has a neckline around 0.9605 and a
target at 0.9425. Only support noted on the horizon is 0.9530 (former
resistance now turned support) as beyond there we have nothing until
the all-time lows of 0.9301 seen on 31 Dec.

Source: ActionForex.Com

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