Pound Takes A Breather, Carries At Risk

Forex News and Events:

The escalating tensions in Iraq and the US decision to send troops to secure diplomatic posts keep the risk sentiment limited in the FX trading. The carry trades face an unwind risk due to reversal in international capital flows, while traders’ look for dip-buying opportunities in gold and oil price corrections. In UK, the GBP-complex takes a breather after the inflation figures disappointed in May report. The pound sold-off against EUR and USD, with no damage to key technical thresholds. Traders’ attention shifts to US inflation walking into New York open - the last leading data before FOMC decision scheduled on June 18^th.

UK CPI disappoints

The consumer prices accelerated at the slower pace of 1.5% y/y in May (thus failed to replicate April’s surprise hike to 2.0% perhaps due to Easter demand); the CPI m/m printed -0.1% versus 0.2% expected. The softness in inflation is mostly explained by food and transport prices. As knee-jerk reaction, GBP/USD spiked down to 1.6938 yet no critical levels have been damaged. EUR/GBP recovered to 0.80083, lifting the RSI up to 27%. We see need for deeper upside correction at the short-run. The supply zone at 0.80000/0.80500 is to be challenged. While such moves allow the GBP-bulls to take a breather, we do not modify our mid-term bullish call on GBP.

Iraqi tensions to sustain gold and oil prices

The Iraqi concerns keep the Gold-appetite tight as US troops are deployed to protect the diplomatic posts on the unrest region. XAU/USD tests 50/100-dma ($1,286.01 / $1,298.53) on fresh safe-haven demand and short coverings, especially given the subdued USD recovery. As geopolitical risks intensify, it is certainly safer to keep away from the short side of the play. XAU/USD sees support at $1,262.70 / $1,266.45 (Fibonacci 38.2% level on January-March recovery / 21-dma). The formation of bearish engulfing line indicates that the tech-supported bullish attempts may ease yet the bias remains on the upside. Important support lies at $1,238.

The WTI crude oil has now recovered ¾ of Sept’13 – June’14 losses, the pressures in Iraq and tensions between Ukraine and Russia clearly put upside pressures on the entire forward curve. The Brent corrects Friday’s rally to $114.69 (9-month highs). Although the overbought conditions suggest deeper downside correction, the Iraqi tensions keep the bias on the buyside.

Carries at risk

As the risk sentiment fades, the international capital flows give signs of reversal; this places past weeks’ carry-oriented positions at risk. The commodity currencies and the high yielding EMs are subject to unwind risk. USD/BRL sees support at April-June uptrend’s lower band (today ranging between 2.2250/2.3000), USD/TRY is heading towards 2.1500/48 (psychological level / 100-dma) as, in addition the discussions on whether CBT will cut rates on June 24^th MPC meeting (as required by the ruling government AKP) or fight the potential high volatilities amplify the selling pressures.

Looking at the antipodeans, the AUD/USD failed to clear offers at 0.9400/50 zone and currently tests the Fibonacci 61.8% support (on Oct’13 – Jan’14 drop). The pessimism in RBA minutes regarding the efficiency of low rates in offsetting the fading mining investments should keep the pressures tight on the pair. In New Zealand, NZD/USD risks have not materialized yet the persistent decline in NZ 2-year yields since May 30^th has sharply reversed since the week began.

The Risk Today:

EUR/USD's bullish intraday reversal on 5 June has created a key support at 1.3503, favouring a consolidation phase. However, a short-term bearish bias is favoured as long as prices remain below the hourly resistance at 1.3602 (10/06/2014 high). Another resistance stands at 1.3677. In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. The long-term downside risk implied by the double-top formation is 1.3379. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBP/USD is challenging the major resistance at 1.7043 (05/08/2009 high). The short-term bullish momentum is intact as long as the initial support at 1.6943 holds. Another support can be found at 1.6882 (27/05/2014 high). In the longer term, a bullish bias is favoured as long as the support at 1.6661 (15/04/2014 low) holds. The persistent buying interest favours an eventual break of the major resistance at 1.7043 (05/08/2009 high). Other resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low).

USD/JPY is trying to bounce near the support implied by the 200 day moving average (around 101.60). However, a break of the hourly resistance at 102.14 (12/06/2014 low) is needed to negate the current short-term bearish trend. Another hourly resistance lies at 102.42 (intraday high, see also the declining trendline). Another support stands at 101.43 (29/05/2014 low). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average and 100.76 (04/02/2014 low). A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF has thus far failed to break the strong resistance area between 0.9012 and 0.9037. However, the current mild correction in prices suggests persistent buying interest. An initial support lies at 0.8960. Other supports stand at 0.8908 (05/06/2014 low, see also the 38.2% retracement) and 0.8883. From a longer term perspective, the bullish breakout of the key resistance at 0.8953 suggests 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. A key resistance stands at 0.9156 (21/01/2014 high).