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EUR/GBP: reasons for a drop
Despite the recent bullish correction of the EUR/GBP, we see enough reasons to remain bearish on the pair in a longer term.
As can be seen from the H4 chart, last week EUR/GBP broke below the short-term bullish support line, hinting that the upward retracement is over.
What’s more, we can see a head-and-shoulder pattern with a neckline at 0.7825. This pattern marks a significant top in the market and would be confirmed by a break below the neckline.
Taking into consideration the reasons cited above, we recommend selling EUR/GBP at 0.7820 (just below the neckline), targeting 0.7760 (lowest level since August 2008) and with a stop at 0.7885 (above the right shoulder of the pattern).
From a fundamental point of view, euro zone’s debt woes are reviving with renewed vigor as the summer comes to an end. On August 20 Greece faces redemption of a 3.2 billion-euro bond held by the ECB. Note that the British pound may find support after we’ll see the first economic results of the London Olympics.
Chart. H4 EUR/USD
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RBC: UK economic paradox
Analysts at RBC note a strange inconsistency between the UK GDP (-0.7% in Q2) and the positive employment figures. In their view, it would be similar if the US NFP rose by 300K a month for three straight months along with the GDP contraction. However, the improvement of employment figures may be due to a short-term effect from the London Olympics.
Despite the fact that all the MPC members voted to leave the current monetary policy unchanged, many market participants still believe the BoE will opt for more monetary easing in the coming months to aid an economy struggling in a deep recession.
On Wednesday GBP/USD trades on the upside after the MPC minutes and the positive labor market data, but still remains below the $1.5700 mark. The pair remains capped in a sideways channel and below the 200-day MA resistance.
Chart. Daily GBP/USD
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US data disappoints
Why can’t US data be unambiguous? Today’s figures disappointed the market after positive data released yesterday.Lower inflation and tumbling manufacturing activity is just what the Fed has been worried about. The fig
ures increase the odds of QE3. Does anyone here want certainty at last?
US consumer prices were unchanged in July (vs. +0.2% expected). Core CPI, which excludes the volatile categories of food and energy, rose by 0.1% (vs. 0.2%) expected. Empire State manufacturing index fell to -5.9 in August from 7.4 in July, showing the biggest miss in 14 months.
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August 16: forex news
US dollar strengthened versus its major counterpart after better-than-expected industrial production data (+0.6% m/m in July). The market has started to take out a little bit of pricing for QE3 in the near term.
High-yielding currencies were also affected by negative foreign direct investment figures from China showing a decrease by 3.6% y/y. AUD/USD trades below $1.0500 mark after falling to $1.0453 yesterday. NZD/USD remains close to the key $0.8060 levels. New Zealand business manufacturing index slid to 49.4, indicating industry contraction. USD/CAD reached a new three-month low around 0.9880.
EUR/USD slid yesterday below $1.2300. Today euro revisited this area, but then dived to the levels around $1.2280. In Europe the most important publication is one of the CPI at 09:00 GMT. Spanish debt auction was canceled. GBP/USD is consolidating this week above $1.5660. Watch for UK retail sales data at 8:30 GMT.
USD/JPY managed to keep pushing higher: the pair rose above the 200-day MA as US bond yields climbed to more than 6-week maximums.
US housing data (building permits, housing starts) are released today at 12:30 GMT. Stronger than expected figures will further decrease the odds of QE3, especially after more solid industrial production reading came on Tuesday. As usual on Thursdays, watch for US unemployment claims, also at 12:30 GMT.
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QE3: analysts' reasoning
The expectations that the Federal Reserve will launch QE3 as early as in September weakened after amid better-than-expected July retail sales and industrial production figures.
Standard Chartered: “We are seeing increasing signs of stabilization in the US. The U.S. improvement is in contrast to the persistent weakness elsewhere. So that's dollar positive because (interest) rate spreads move in favor of the dollar.”
At the same time, there are more data releases ahead. And in case of disappointments the economic pessimism and the talk of more easing from the Fed may return very quickly.
Mizuho: “It's too early to celebrate with both hands in the air. Corporate sentiment provides the best gauge of current conditions. You have to think about what might happen if the Philly Fed index turns out to be weak. That could change the trend again.”
Empire State manufacturing index released on Wednesday slid to -5.9. Watch for Philly Fed manufacturing index at 14:00 GMT.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2250, $1.2300, $1.2320, $1.2335, $1.2500 (large);
USD/JPY: 78.85, 78.90, 79.25, 79.50;
GBP/USD: $1.5550, $1.5730;
AUD/USD: $1.0300, $1.0445, $1.0480, $1.0510;
EUR/JPY: 95.00.
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AUD/USD: technical comments
AUD/USD trades below $1.0500 mark after falling to $1.0453 yesterday. The pair still remains in a correction mode. At the same time, uptrend borders are intact for now and Aussie has chances to further gains as long as it’s staying above support in the $1.0440/50 area (August 1, 3, July 30 minimums, July 19 maximum).
It makes sense to look for opportunities to buy AUD/USD at $1.0530 and higher. Note that resistance for the pair lies at $1.0600 (psychological level, recent maximums), $1.0660 (downtrend resistance line connecting 2011 and 2012 maximums).
Chart. AUD/USD
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US Treasuries: Japan’s catching up with China
For now China remains the top holder of US debt, but if both countries continue buying at their respective paces until the end of 2012, Japan will end the year with more Treasuries. Japan’s buying US dollars trying to contain yen’s appreciation.
Japan bought $10.4 billion of Treasuries in June. All in all, the nation purchased $61.3 billion of American debt in 2012. Japan’s total holdings of Treasuries account for $1.1193 trillion.
China increased its portfolio of US government securities by $300 million in June. This year’s purchases are equal to $12.4 billion. All in all, China’s holdings of Treasuries account for $1.1643 trillion.
While China’s holdings have fallen by around $143 billion in the past year, Japan has boosted its portfolio by $237 billion in the same period.
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Analysts: comments on BoE easing prospects
Positive July UK retail sales figures (+0.3% vs. consensus 0.0%, June reading was revised to +0.8%) together with yesterday’s labor market data made many investors more optimistic on Britain’s economic prospects. However, specialists at ING and Rabobank still expect the BoE to continue monetary policy easing.
ING: The uncertainty over the UK data, coupled with worries about Europe and the US fiscal cliff will keep the BoE wary. We expect the central bank to introduce more stimulus in November.
Rabobank: The BoE's QE expansion is possible at the end of 2012. We acknowledge the positive UK employment and retail sales data, but on balance the UK economy is providing little cause for celebration.
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USD/JPY needs to close above 200-day MA
The greenback is rising versus Japanese yen for the fourth day in a row. USD/JPY has tested the levels above the 200-day MA for the first time since the middle of July. Today the pair renewed 1-month maximum rising to 79.36. We think that US dollar has to close today above the 200-day MA at 79.20 for the bulls to keep pushing the pair up towards 80.60 (June maximum). If this line is only pierced, the pair could drift lower aiming at 78 yen.
Here’s what other analysts say.
Standard Chartered: The greenback may rise to 80 yen in the short term.
CBA: When non-Japanese yields start rising, then you get more Japanese investors putting money offshore. This and low volatility are “very supportive of the yen’s weakness”.
Mizuho: In any case US dollar will find it tough to break above the 79.50 yen to 80.00 yen region unless there is another strong catalyst, given the potential for dollar-selling by Japanese exporters at such levels.
Chart. Daily USD/CHF
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