Forex News and Events:
The BoE and the ECB verdicts are scheduled today at 11:00 GMT and 11:45 GMT respectively; the ECB President Draghi’s monthly press conference will take place at 12:30 GMT. We expect both central banks to maintain status quo, however will be closely listening to what Mr. Draghi has to say in his post-policy speech. Recently, we noted sharp drop in markets’ inflation expectations. According to Barclay’s, the average inflation expected over five years starting in five years dropped to 1.95% last week, below 2.0% closely watched by traders. In Jackson Hole, Draghi had stood ready to use “all available instruments needed to ensure price stability over the medium term”, introducing more doubts about the inflation expectations being “well anchored”! Will these developments bring more ECB action any time soon?
At this point, Euro-zone countries clearly voice their will for further monetary stimulus in order to avoid deflation in 18-nation monetary union. The so-discussed additional stimulus would be the introduction of a quantitative easing program, with significant bond purchases to insure liquidity in periphery but also reduce fragmentations between the core and the peripheral Euro-zone. This is a possibility that we do not rule out in the foreseeable future. Regarding today however, our bets remain balanced as we believe Draghi will be keener on awaiting the outcome of TLTROs, which will be effective in September and December before taking further action. In this context, we expect the ECB to sound cautious and to not pull the trigger at today’s policy meeting. Inaction should result in deeper short-covering in EUR-complex and push EUR/USD toward 1.3200/1.3296 (psychological level and former key support). Traders will most likely see bullish attempts as top selling opportunities. In the opposite case scenario, the breakout of 1.3105 support should trigger stronger negative trend, shifting focus to 1.3000 psychological level first, then 1.2755 (July 2013 low).
The BoE decision is perhaps a non-event
The BoE is expected to keep its bank rate unchanged at the historical low of 0.50% and its asset purchases target stable at GBP 375bn. The slack in wage growth is the main reason why GBP-hawks stand in sidelines, while traders’ seem more focused on Scotland independence talks these days. Therefore, we believe that the BoE decision will be a non-event. GBP/USD currently trades at lowest levels since mid-February. We begin receiving technical oversold signals (RSI at 24%, 30d lower Bollinger band at 1.6397). Decent option barriers are likely to limit corrective bull attempts above 1.6500+.
EUR/GBP tests 0.80000 offers
Following the decisive rebound from 0.78918 on Sep 1st, EUR/GBP is back testing 0.80000 offers. In case of a short-term bullish reversal in EUR sentiment following ECB/Draghi today, EUR/GBP should get a boost to clear solid 0.80000-resistance. A positive breakout should reinforce the bull trend; the MACD (12, 26) indicator will step in the green zone for a daily close above 0.80000. Option related offers trail below this level, yet no significant barriers are eyed above for days ahead. First line of offers should come into play at 0.80330/90 region, including June-August tops (0.80339 and0.80363 respectively) and the 100-dma (0.80390). More mid-run resistance is eyed at 0.81000/500, then 0.84000 (March highs). Although our longer-run view remain comfortably bearish based on ECB/BoE divergence, the short-run market conditions are likely to challenge EUR/GBP bears. Indeed, three-month EUR/GBP forwards trade at year high premiums, the cross currency basis confirms preference for EUR despite negatively trending EUR/GBP since May this year. Moreover, EUR/GBP 25-delta three-month risk reversals spiked to highest levels since September 2013 and are about to turn positive, meaning that traders bet for higher strikes in 3-month maturity and these bets are significantly boosted since the week began.
Today's Key Issues (time in GMT):
2014-09-04T11:00:00 GBP Bank of England Bank Rate, exp 0.50%, last 0.50%2014-09-04T11:00:00 GBP BOE Asset Purchase Target, exp 375B, last 375B
2014-09-04T11:30:00 USD Aug Challenger Job Cuts YoY, last 24.40%
2014-09-04T11:30:00 USD Sep RBC Consumer Outlook Index, last 51.5
2014-09-04T11:45:00 EUR ECB Main Refinancing Rate, exp 0.15%, last 0.15%
2014-09-04T11:45:00 EUR ECB Marginal Lending Facility, exp 0.40%, last 0.40%
2014-09-04T11:45:00 EUR ECB Deposit Facility Rate, exp -0.10%, last -0.10%
2014-09-04T12:15:00 USD Aug ADP Employment Change, exp 220K, last 218K
2014-09-04T12:30:00 CAD Jul Int'l Merchandise Trade, exp 1.15B, last 1.86B
2014-09-04T12:30:00 USD Jul Trade Balance, exp -$42.4B, last -$41.5B
2014-09-04T12:30:00 USD Aug 30th Initial Jobless Claims, exp 300K, last 298K
2014-09-04T12:30:00 USD Aug 23rd Continuing Claims, exp 2510K, last 2527K
2014-09-04T12:30:00 USD 2Q F Nonfarm Productivity, exp 2.40%, last 2.50%
2014-09-04T12:30:00 USD 2Q F Unit Labor Costs, exp 0.50%, last 0.60%
2014-09-04T13:45:00 USD Aug F Markit US Services PMI, exp 58.5, last 58.5
2014-09-04T13:45:00 USD Aug F Markit US Composite PMI, last 58.8
2014-09-04T14:00:00 USD Aug ISM Non-Manf. Composite, exp 57.6, last 58.7
The Risk Today:
EURUSD EUR/USD is testing its key support at 1.3105 (06/09/2013 low). Will today's ECB meeting be able to push prices lower? Hourly resistances stand at 1.3221 (28/08/2014 high) and 1.3297 (22/08/2014 high). Another support is given by the psychological threshold at 1.3000. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. A long-term decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) is favoured. However, in the shorter term, monitor the test of the key support at 1.3105 (06/09/2013 low) given the general oversold conditions. A key resistance lies at 1.3444 (28/07/2014 high).
GBPUSD GBP/USD continues to challenge its key support at 1.6460. The current lack of bounce indicates persistent short-term selling pressures. Hourly resistances stand at 1.6563 (29/08/2014 low) and 1.6644 (01/09/2014 high). In the longer term, the break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) invalidates the positive outlook caused by the previous 4-year highs. Key supports stand at 1.6460 (24/03/2014 low) and 1.6220 (17/12/2013 low).
USDJPY USD/JPY is close to its strong resistance at 105.44 (see also the 61.8% retracement and the long-term declining trendline). Hourly supports can be found at 104.49 (25/08/2014 high) and 104.22 (intraday low, see also the 61.8% retracement). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high).
USDCHF USD/CHF has weakened recently, but remains within its short-term rising channel. The hourly support at 0.9177 (01/09/2014 low) is challenged. Other hourly supports are given by the rising channel (around 0.9153) and 0.9126 (28/08/2014 low). An hourly resistance now stands at 0.9212 (02/09/2014 high). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The first upside potential at 0.9207, implied by the March-May double-bottom formation, has been met. Key resistances stand at 0.9250 (07/11/2013 high) and 0.9456 (06/09/2013 high).
