Greenback Widely Offered, EUR Doves On The Sidelines

Forex News and Events:

The US dollar is broadly offered versus its G10 and EM counterparts. Since the BoJ announced status quo overnight, we see sustained pullback in USD/JPY and JPY crosses. In UK, data showed faster-than-anticipated industrial output, thus boosting GBP-bulls pre-BoE scheduled on Thursday; EUR/GBP hit a month-low. Across the Channel, EUR extends gains versus USD while traders chase opportunities to sell the rallies. We highlight that the event risk rises as Ukraine crisis comes back in the headlines.

EUR-doves step back

EUR/USD recovery gains traction as ECB’s Mersch and Nowotny state there is no rush for more easing in the Euro-zone, perhaps not because additional stimulus is not needed yet because the ECB alone cannot resolve the Euro-zone crisis (well beyond its monetary policy power). Anyhow, the deflationary fears remain real and have concrete positive impact on real interest rates. This is basically seen as the major explanatory reason of fragility in EUR/USD pullbacks, despite hawkish shift in Fed expectations.

EUR/USD cleared resistance at 1.3738 / 52 zone (50-dma & Fib 23.6% on Nov-Dec rally) as Europe walked in this morning. Trend and momentum indicators remain comfortably bearish, however the week started on a clear positive note with support strengthening at 100-dma (1.3694). Given the broader bearish bias, we remain seller on rallies as long as 21-dma resistance holds (1.3809).

EUR/GBP took a dive to one-month low (0.82358) in London as UK manufacturing and industrial production printed faster expansion in February data. Given the strong negative bias, we keep our bearish view. Next target stands at 0.82042 (March 5^th low).

Mixed data out of France

On a side note, France released lower trade deficit from EUR -5,732 mio to EUR -3,368 mio in February, yet the budget deficit expanded from EUR 12.7bn to EUR -25.7bn. Given the micro-economic / political situation in France (higher taxes, unemployment, political tensions, rise of anti-austerity followers, etc) we suspect these numbers hide unresolved issues in France as in other EZ periphery countries. We expect to see a tenser Europe walking into March elections.

Yen gains post-BoJ verdict

In line with our expectations, the BoJ pledged to expand monetary base at steady annual pace of 60-70 trillion yen. Given the significant increase in sales tax (from 5% to 8%), we expect the BoJ to proceed with additional stimulus by June /July meetings, once the impact of higher taxes are quantifiable on nationwide price dynamics. We believe that BoJ’s decision to postpone policy action is to maximize the benefits out of additional stimulus. Given the BoJ massive monetary expansion program already running, the timing for marginal stimulus (of roughly 1-2 trillion yen) is key to generate relatively sizeable market reaction. There is the paradox; could the market expectations of a “surprise by July” lift downside volatility in Yen crosses? The 1-month implied vol on USD/JPY hit 7.40%, the lowest since November 2012 when Abe first showed up with his will to aggressively boost inflation in Japan.

The BoJ inaction pulled USD/JPY down to 102.75 in Tokyo, the pair extends weakness as European traders adjust positions; we expect further downside through New York. The intra-day bias is clearly on the downside. Offers should hold tight below the daily Ichimoku cloud top (103.10). We see option bids above 102.75 for today, while selling interest intensifies below.

On a similar pattern, EUR/JPY turns offered below the 21-dma (141.67). The MACD (12, 26) stepped in the bearish zone and suggest deeper downside correction for a daily close below 141.80. The pair is likely to break into the daily Ichimoku cloud cover (139.39/140.96). Option barriers stand at 142.00/10 for today’s expiry.

The Risk Today:

EUR/USD is bouncing close to the key support at 1.3643. Hourly resistances are given by 1.3753 (02/04/2014 low) and the declining channel (around 1.3786). Hourly supports now lie at 1.3694 (07/04/2014 low) and 1.3673. In the longer term, EUR/USD is still in a succession of higher highs and higher lows. However, the recent marginal new highs (suggesting a potential long-term rising wedge) indicate an exhausted rise. As a result, we would favour selling short-term overextended rallies. A significant resistance now lies at 1.3876 (24/03/2014 high).

GBP/USD is experiencing some buying interest close to the support implied by the rising channel (around 1.6538). The hourly resistance at 1.6621 (02/04/2014 low) is challenged. Other resistances can be found at 1.6684 and 1.6718 (see also the declining trendline). Another support stands at 1.6460. In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. Another key support stands at 1.6220 (17/12/2013 low).

USD/JPY is testing the support at 102.68 (see also the 50% retracement). A break of this level would negate the recent technical improvements and open the way for further weakness towards the supports at 101.72 and 101.20. Hourly resistances stand at 103.44 (previous support) and 104.13. A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.80) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013)) holds. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF has thus far failed to decisively break the key resistance at 0.8930 and is now testing the support implied by its rising trendline (around 0.8859). Other hourly horizontal supports stand at 0.8844 (03/04/2014 low) and 0.8814. An hourly resistance now lies at 0.8953. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures. A decisive break of the key resistance at 0.8930 would open the way for further strength towards the resistance at 0.9038 (12/02/2014 high).