Daily Wrap: EUR/USD, GBP/USD, USD/JPY

EUR/USD

The pair remains in a bearish pattern. The next major support level is seen at 1.2876, the December low, and also links with the mid-point of the July 2012 to February 2013 advance at 1.2877, and then 1.2661. OIS/Euribor spreads widened this morning, and money market curve is seen marginally flatter on the back of growing expectations of a potential interest rate cut by the ECB later on this week (implied OIS rates indicate that there is around 30% probability that the ECB will cut rates in March). In terms of fundamental news flow, Italian President Napolitano is exploring the creation of a second technocrat government according to press reports. Italian officials say ECB's Visco is front-runner to take over as premier, despite warnings this will be seen as an elitist ploy. Napolitano wants to bring forward the first parliamentary meeting to March 12th from the 15th to begin talks to form a new government.

GBP/USD

In spite of trading marginally higher on Monday, the pair remains in a bearish trend and there is scope for further downside, especially if the MPC vote expands the Asset Purchase Facility (APF). Technical support levels are seen at 1.4949 and then at 1.4646, followed by a major support at 1.4226 which is the May 2010 low. The release of less than impressive macro economic data, this time in form of the latest Construction PMI (lowest since October 2009) was met with a brief knee jerk selling reaction which was quickly retraced, as market participants used the latest sell-off to re-enter short-term longs. In terms of fundamental news flow, the Shadow Monetary Policy Committee (SMPC) decided 5-4 that the Bank Rate should be raised on this week. This represented the 2nd consecutive month that a majority of the SMPC had decided that a rate increase was justified on economic grounds. However, no one expected to see an actual rate change this close to Mr Osborne’s 20th March Budget. The majority view was that the QE stock should be held at its present GBP 375bln.

USD/JPY

Even though the pair traded in minor negative territory this morning, the underlying bias remains bullish, as indicated by better bid implied vols and scope for the pair to make another test on the February high at 94.77. Once broken, market participants will then look to target 99.875 level which is the 50% retracement of the June 2007 to October 2011 sell-off. During the parliament hearing for the BoJ governor, nominee Kuroda said that he will do whatever it takes to end the deflation.