By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
USD
The successful issue of bonds in Spain and Ireland were arguments in favour of the euro yesterday. The fact that the euro was nonetheless unable to defend levels around 1.29 due to weakening stock markets overnight supports our theory though: the structural issues remain, only over boarding risk appetite supports the euro short term. While Greek CDS remain at levels around 800bp market signals are obvious: They do not believe that the aid packet for Greece will work. That is not going to be an issue over the next few days or weeks. But the fact that EUR-USD risk reversals trade more negatively the longer the maturity means that EUR risks are still considered to be real. Even if EUR-USD might be able to appreciate in phases when little data is released (as is the case this week) as long as risk appetite is on the up (as illustrated by the stock market performance of indirectly by the VIX) there is very little upward scope. In particular as the biggest threat for the dollar is unlikely to become virulent today. Fed officials are not planning any speeches. Tomorrow the head of the St. Louis Fed James Bullard might once again fuel doubts about the Fed’s policy with his demands for further bond purchases.
EUR
Ireland’s 2014 and 2020 bond auctions largely passed without incident. Spreads were already tightening ahead of the auction, and final bid-to-cover ratios of 5.4 and 2.4 respectively show that demand remains firm. The Spanish auction of bills was also firm and the sharp decline in borrowing costs will be a welcome respite for the government, though investors will closely monitor fiscal conditions. But the Irish central bank governor signaled that the domestic banking system would need more capital, so financial sector capitalization remains an issue.
GBP
Consumer price inflation in the UK continues to fall but only hesitantly. As expected the yoy rate had eased only slightly in July to 3.1% compared with 3.2% in June. Once again the governor of the Bank of England, Mervyn King, had to explain in a letter to the Minister of Finance why the rate of inflation had exceeded the inflation target of 2% by more than 1 percentage point. In the letter King essentially repeated the information published in the BoE’s last inflation report. Exogenous factors (VAT, commodity prices, weaker Sterling) are responsible for the fact that inflation pressure is easing only slowly and that is unlikely to change soon. While the BoE gives exogenous reasons for the high rate of inflation and continues to assume that the rate will drop to below 2% in 2012 rate rise expectations are likely to be premature. In particular as the core rate of inflation fell more notably than expected to 2.6% in July. The minutes of the last rate meeting due for publication today are likely to show that central bank member Andrew Sentance once again voted in favour of a rate rise. That is unlikely to be enough to support Sterling. Quite the contrary, markets might be disappointed if no other member shared Sentance’s view.
JPY
Kaneko, a DPJ lawmaker in the upper House of Councillors, called for FX intervention on the grounds that “intervention is necessary to show that the government cannot accept the current level”, of the yen although he accepted that the impact of doing so without international coordination would be limited”.
TECHNICAL OUTLOOK
EURUSD BEARISH Momentum is negative; next support below 1.2604 lies at 1.2152 ahead of 1.1877 key low. Initial resistance at 1.2933 ahead of 1.3334
USDJPY BEARISH Next big support below 84.73 lies at 79.95. Near-term resistance at 87.15 ahead of 88.12
GBPUSD NEUTRAL Model is neutral; pressure on 1.5536 initial support break of which would expose 1.5324. Need a break above 1.5999 for resumption of bullish trend.
USDCHF BEARISH Stalled above 1.0332; break of the level would open 1.0131 ahead of 0.9918 key support. Near-term resistance is defined at 1.0534 ahead of 1.0676
AUDUSD NEUTRAL Model is neutral; 0.9222 and 0.8860 mark the near-term directional triggers.
USDCAD NEUTRAL Momentum is slowing; while support holds at 1.0108, resistance is defined at 1.0494 ahead of 1.0680
EURCHF BEARISH Currently holds support at 1.3272 break of which would expose 1.3074. Near-term resistance at 1.3539 ahead of 1.3924
EURGBP BEARISH Outlook is bearish; violation of 0.8068 would expose 0.7694 next. Short-term resistance is defined at 0.8363
EURJPY BEARISH Trend is bearish; focus is on 107.32; move below the level would open 104.72. 111.57 defines the near-term resistance
Forex Daily Market Commentary provided by GCI Financial Ltd.
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