GBP/USD: Testing The Downside

The bearish patter remains firmly intact for EUR/USD and there is a risk of further downside should the pair break the December low seen at 1.2876, which once broken opens the door towards the November low at 1.2661. IT/GE 10s spread widened on Monday as market participants not only reacted to the latest sovereign rating downgrade but also pre-positioned ahead of this week's supply from the Italian Treasury. As such, Italian bonds underperformed its EU peers, with 2/10s flatter by 3bps and 10s IT/GE spread wider by 9bps. Italy's 5-Star Movement have said there is to be no referendum on alliance with the Bersani's PD. Grillo's party said the objective is a unique 5-Star government.

GBP/USD
The momentum continues to favour the bears and now that the pair has broken through the psychologically important 1.5000 level to the downside, the next major support is seen at the June 2010 low at 1.4687. Once broken, market participants will look to test the May 2010 low at 1.4226. In terms of fundamental news flow, David Smith writes that’s there is speculation that Chancellor Osborne could go back to favouring an inflation range (vs. a target) for the Bank of England ahead of Carney’s arrival.

USD/JPY
The pair traded higher on Monday, albeit in a tight range and there is little indication that the bias will make a significant shift in the near term, which leads to believe that the pair will continue to edge higher. In terms of technical levels, next major technical resistance level is seen at 97.79, which is the August 2009 high, followed by the 50% retracement of the June 2007 to October 2010 sell-off at 99.875. In terms of Japan specific commentary, the Bank of Japan governor nominee Kuroda said that he can not say now about whether to abolish interest rates paid to excess reserves parked at the BoJ, or adopt negative interest rates. He also added that he will consider bringing forward open-ended asset purchases from 2014.