UK Takes Center Stage

The UK will take center stage today and tomorrow with inflation and BoE PMC meeting minutes. Given last week’s more dovish than anticipated inflation report, traders will be analyzing these two key events carefully. Sunday it was reported that BoE Governor Mark Carney stated that the central bank might now wait for real wages to actually increase before hiking policy rates. Then Carney went on to say that the underlying trend of the economic data was more important to the decision making process. He has also suggested that UK CPI inflation is expected to fall slightly from 1.9% y/y to 1.8%. RPI should increase to 2.7% from 2.6% y/y in June. As for the BoE Minutes, recent minutes indicate that disagreement on the timing of a policy hike has increased. The committees are now largely focused on the direction of wage growth. There is a distinct possibility that one or two committee members will vote for a hike in August.

Don’t rule carry out just yet

The combination of disappointing US data such as retails sales and Michigan confidence, fears of Yellen’s vague labor market derived dovishness ahead of Jackson hole and rising geopolitical tensions have damaged EM carry trades. As FX volatility eased after last week’s spike and yields remain low, traders will begin looking at EM carry once again, even if risk-reward is constricted. We suspect that countries with domestics issues and proximity to Russia will under-perform. But with a low sensitivity to current global geopolitical events and falling commodities prices, Asian countries without a significant dependence to commodity exports should benefit. That said, high yielding commodity producers such as AUD and NZD should find it difficult in the current environment. Thailand reported that Q2 GDP expanded by 0.4% q/q above the market expectations for 0.0%, partially reversing the -1.9% contraction witnessed in Q1. With military government providing much needed stability, domestic demand saw a rebound of 10.8% q/q. In addition, investments recovered and consumer confidence returned. While domestic demand is significantly off its 2012 peak, removing business activity with suppressing anti-government protest has allowed commerce to return. In the coming months we suspect that business and consumer sentiment will improve and lucrative tourism will aggressively return (especially as the curfew gets lifted). The BoT projections for 2014 growth is a soft 1.5%, which given yesterday’s read is below the 2.1% which we suspect is possible. Finally, the BoT most likely has finished their easing cycle but will keep policy accommodating for support the government reform effort.

The Risk Today:

EURUSD is weakening and is now approaching its support at 1.3333. A strong support stands at 1.3296 (07/11/2013 low). An initial resistance now lies at 1.3366 (intraday high), while an hourly resistance can be found at 1.3415 (13/08/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A key resistance lies at 1.3549 (21/07/2014 high).

GBPUSD is trying to bounce near the key support at 1.6693 (see also the 38.2% retracement and the 200 day moving average). However, buying interest remains thus far unimpressive. Hourly resistances are given by the declining trendline (around 1.6776) and 1.6844 (13/08/2014 high). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A decisive break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) is needed to invalidate this bullish outlook.

USDJPY continues to be supported after the sharp bullish intraday reversal (hammer) made on 8 August. However, the key resistance at 103.02/103.09 (30/07/2014 high) will be hard to break. An hourly resistance lies at 102.72 (15/08/2014 high). Hourly supports can be found at 102.14 (15/08/2014 low) and 101.51. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. Another resistance can be found at 104.13 (04/04/2014 high), while a major resistance stands at 110.66 (15/08/2008 high).

USDCHF strengthened yesterday, erasing all the losses made on Friday. Monitor the resistance implied by the declining channel (around 0.9091). Another resistance lies at 0.9115. A key support stands at 0.9008 (see also the rising trendline). Another support can be found at 0.8969 (17/07/2014 low). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. As a result, a test of the strong resistance at 0.9156 (21/01/2014 high) is expected.