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Analysts: comments on BoE decision
Barclays Research: The August Inflation Report (next Wednesday) is expected to be dovish as the domestic economy and external demand both are weak and inflation in decline. We expect the MPC to increase QE in November by 50 billion pounds and to cut Bank rate to 0.25%.
Royal Bank of Scotland: Last month's boost to the asset purchase scheme needs a little time to bed in, as do the new schemes to encourage lending. But the situation is serious, so the Committee is unlikely to have ruled out looser policy in future.
Investec: We continue to judge that for now the Bank will use quantitative easing tool. A Bank rate cut would hit bank’s margins and lending volumes.
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GBP/USD: technical comments
On Friday GBP/USD gains despite today’s release showed UK services PMI dropped in July. The pair trades above $1.5500 and has completely retraced yesterday’s losses. This week GBP/USD declined for four consecutive days, touching $1.5490 on Thursday. On the H4 chart and on the daily chart the pair trades below the 200-, 100- and 50-day MAs. As can be seen from the daily chart, today sterling approaches the 50-day MA and the lower boundary of the Ichimoku cloud. The pair has been bouncing in a $1.5450-1.5750 range since June after trading in a bearish channel in May.
In our view, GBP/USD is likely to remain in a sideway channel in the nearest future because of the strong resistance levels concentrated in the $1.5735/85 area (200-day MA, 50% Fib. retracement from a May drop and the upper boundary of a daily Ichimoku cloud). Once inside the Cloud, the pair will likely reach its top or at least 200-day MA close which lies about 50 pips below the apper border of Kumo. A close above $1.5780 could open the way for a further rise to $1.5904. On a downside the next support for the pair out of the bounds of the sideways channel lies at $1.5392 (July 12 minimum) and at $1.5267/33 (June and 2012 minimums).
Chart. Daily GBP/USD
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London Olympics disappoint
According to recent data, London Olympics attracted around 100 000 foreign tourists. However, the figure is modest in comparison to 300 000 people normally visiting London in August. Event the city center is desert, because the Londoners are afraid of the inrush of tourists.
Meanwhile, London hotels lower prices by 25% as the rooms lie empty. Workload of the subway increased only by 4%. All the above mentioned facts put in doubt the idea that the Olympic Games will boost the UK economy in a short term.
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Analysts’ opinion about ECB’s approach
Draghi’s press conference has greatly agitated the markets as the ECB’s chief disappointed investors by announcing no new bond-buying and giving only some vague promises. Let’s see what analysts think about the whole situation:
ING Bank: “Nothing is going to happen until countries ask the [rescue funds] to intervene. The ECB is not the big savior of the euro.”
High Frequency Economics: “Once again, we have no commitment to action from the ECB, and no execution of promises previously made. Nothing seems set to happen now. Traders and investors who expected immediate action are, and should be, disappointed. More scolding of governments, but no ECB action, is the bottom line.”
Sumitomo Mitsui: “All the vital decisions seem to be pushed back to September. But given worries about funding of Greece and Spain, risk for financial markets will rise as time goes by.”
Barclays Capital: there was “a clear sign that the ECB is prepared to change policy significantly at its September meeting, in terms of purchasing debt without claiming seniority subject to the EFSF being deployed to buy government debt”.
BNP Paribas: “Expectations should have been much better managed, and Mr. Draghi's credibility is taking a hit accordingly.”
JP Morgan: “Draghi has unfortunately painted himself into a corner. The ECB does need to demonstrate its credibility... Otherwise Draghi will lose face completely.”
Photograph: Alex Domanski/REUTERS
BofA: EUR/GBP prospects
According to analysts at Bank of America Merrill Lynch, EUR/GBP is to decline to 0.7500 by the end of the year. However a bounce back to 0.8000 is expected by June 2013 as the euro starts to trend higher.
Chart. Daily GBP/USD
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August 6: forex news
EUR/USD is trading about 60 pips below 1-month maximum around $1.2440. Spanish 10-year yields closed on Friday right below the critical 7% mark, while Italian ones closed at 6.08%. Demand for the euro was limited before data tomorrow may show that Germany’s factory orders and Italy’s industrial production fell in June.
The MSCI Asia Pacific Index (MXAP) of shares gained 1.8%, snapping a three-day drop: markets still expect central bankers to stimulate economic growth. Demand for safe currencies, therefore, declined: Japanese yen and US dollar touched the lowest in more than three weeks against the euro. However, risky currencies’ growth is limited and “safe havens” have already started going up ahead of important events scheduled this week. USD/JPY remains flat, demonstrating a decline today.
Risky currencies carefully weaken after Friday’s rally on US NFP release: AUD/USD trades around $1.0560, slightly below a four-month high, while NZD/USD slipped from a three-month high and trades below $0.8200. USD/CAD trades on its lowest level in three month, hovering right above parity.
Events to watch today:
Euro area: Sentix investor confidence (8:30 GMT) is expected to decline from -29.6 in July to -30.8 in August. The indicator is in the negative zone since the second half of 2011.
US: You must have missing Bernanke with all the talk about the ECB, haven’t you? Well, we’re going to hear the news about the Fed’s Chairman anyway as he will speak in a prerecorded video about economic measurement before the 32nd General Conference of the International Association for Research in Income and Wealth. Bernanke may add some comments about the central bank’s decision to add monetary stimulus last week, but will probably say he’s still worried about the state of American economy.
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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: $1.2300, $1.2400, $1.2500 (large);
GBP/USD: $1.5600;
USD/JPY: 77.75, 78.00, 78.25, 78.35, 79.00, 79.20;
AUD/USD: $1.0425, $1.0500, $1.0530;
EUR/JPY: 95.50;
EUR/GBP: 0.7775.
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FX majors from top forecasters
Here are the forecasts for EUR/USD, GBP/USD, USD/JPY, USD/CHF and EUR/JPY from top forecasters. Data were submitted on August 3.
Source: FX Week
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USD/JPY: weekly Ichimoku report
Weekly USD/JPY
On the weekly chart there was another hammer-like candle formed last week, the same as the week before. The market seems well supported above 78 yen whether it’s due to the risk of the Bank of Japan’s intervention or something else.
Tenkan-sen (1) is no longer eager on the upside: the line has turned horizontal at 79.26 and provided resistance for the prices. The next resistance lies at Cloud’s top and the long-term downtrend resistance line around 80.50.
USD/JPY is going sideways and will soon face the bottom on the Cloud which is turning upwards. This line may help the pair if the bulls manage to grasp it and head up following its lead. If the bears pull the pair below Kumo and key support in the 78 yen area, USD/JPY will become more vulnerable for further declines. The next support lies at 77.30 (lower border of the Cloud).
The Ichimoku Cloud (3) remains extremely thin indicating that the market is in the indecision mode.
Chart. Weekly USD/JPY
Daily USD/JPY
On the daily chart the prices managed to get above Tenkan-sen (1). Now this line together with the recent minimums is supporting USD/JPY. As for the resistance, there’s one at 79.00, psychological level plus the horizontal Kijun-sen (2). The bulls will also face some hurdles around 78.60/75, the upper line of the pair’s current consolidation range.
The lines on the chart are going sideways, so, as it was last week, the chart doesn’t show potential for some extensive moves. This week we will probably see the pair above 78 yen as it continues to struggle on the upside. The Bank of Japan will probably stay on hold, but all speaks in favor of more easing in future.
Chart. Daily USD/JPY
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CFTC trader positioning data
The latest Commitments of Traders (COT) report, released on Friday, August 4, by the Commodity Futures Trading Commission (CFTC), showed that on a week ended July 31:
Non-commercial currency traders decreased their bets in favor of the U.S. dollar two days before ECB President Mario Draghi disappointed the markets. The value of the dollar's net long positions fell to $13.65 billion in the week ended July 31 from $20.44 billion the previous week.
Euro net short positions declined in the latest week to 139K contracts from 155K contracts in the prior week. From the chart below you may see that the number of euro shorts squeezed to the January level. At the same time, the single currency trades about 700 pips below its January levels. It means the potential for further short squeezing is low.
Source: Zerohedge
Demand for safe Japanese yen keeps growing: net long positions increased to 32K contracts by 7K contracts.
British pound net short positions declined to 1.8K contracts.
Investors cut Swiss franc net short positions by 7K to 19K contracts. It is necessary to note the demand for
Canadian dollar grew significantly to 12K long contracts.
Net long New Zealand dollar positions increased by 1.3K to 10K contracts, while net long Aussie positions rose by 10K to 73K contracts.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
In the COT report all the market players are divided into three categories: hedgers (commercials), big speculators (non-commercials) and small traders (non-reportable positions). We analyze only non-commercial positions (mainly, these are banks and investment funds).
We recommend you paying attention to:
Extreme Positions: If everyone is already long or short it is a strong indication price may reverse because there is no one left for buyers to buy from and no one left for sellers to sell to.
Changes in Market Positions: When large speculators change their position and go from net long to net short or vice versa, there typically is a good reason they do this.
Changes in Open Interest: Rising or falling open interest may reflect directional commitment or lack thereof and therefore indicate strength or potential reversal of a particular price trend.
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