By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
USD
Yesterday dollar exchange rates reacted quite notably to the surprisingly strong ISM non-manufacturing release. The dollar was able to appreciate notably against the EUR as well as the JPY. This reaction was all but expected. After all there had been doubts recently as to whether the Fed would react appropriately to a positive performance of the US economy (see yesterday’s Daily Currency Briefing). These doubts are however clearly not dominating. Market reaction to tomorrow’s labour market report is likely to be decisive in the end. As a result we will have to wait and see today. Neither new highs nor a significant continuation of the correction seem likely today. During this interim phase between correction yesterday and important data tomorrow nobody is likely to have an appetite for a fundamental re-positioning. It is therefore difficult to see what would provide momentum for a larger EUR-USD move today.
EUR
We do not expect any change in ECB policy as a result of today’s policy decision, and our team do not foresee an actual rate hike until Q2. At the subsequent press conference, ECB President Trichet will likely remain cautious despite recent improvements in Eurozone economic data. Trichet is also likely to be questioned about plans for future ECB tenders, and especially whether these will continue to be conducted on a full allotment basis. His interpretation of recent bank stress test results will also likely be of interest.
JPY
USD-JPY is trading close to the 85 mark, which many analysts consider the beginning of the area where the BoJ might begin to intervene. The reasons for the strength of the yen are above all fears of a double dip and a continued zero interest rate policy in the US. If that was to happen the US would be so similar to Japan that a risk premium for the Japanese currency would no longer be justified. But a stronger yen is not in the interest of Japan. It puts pressure on the export sector and threatens economic recovery. And what is even worse, it creates further deflation pressure. We should not be misled by yoy rates: Reflation has lost momentum since the beginning of the year (see chart). A strong yen makes the fight against deflation even more difficult though. So the BoJ would have every reason to intervene – and it would be able to. It would not have to worry about sterilising the newly created yen. Every yen added to the central bank money supply should please them. Political considerations are one argument against interventions, though. The US Congress is considering harsh measures against countries who “manipulate” the exchange rates of their currencies. Even though this is only referring to China at present, in their eagerness the members of Congress could easily tar Japan with the same brush. However, the further USD-JPY falls the more urgent the need for interventions becomes. Minister of Finance Yoshihido Noda is already gradually stepping up his rhetoric: Yesterday he said the USD-JPY moves were “a bit one-sided”. This is the first and very careful step towards verbal interventions. If USD-JPY continues to fall, further interventions are likely to follow.
GBP
Our team does not expect the BoE to change policy at the upcoming meeting, in line with consensus. Should that be the case, there will be no accompanying statement. Our current forecast is for the first policy rate to be first hiked in Q1 2011 despite some difference of opinion within the MPC as of late. In data releases, services PMI was softer than expected at 53.1 (cons.54.5), though Halifax housing prices jumped 0.6%m/m (cons. -0.3%m/m).
TECHNICAL OUTLOOK
EURUSD NEUTRAL Upside potential toward 1.3511 with next resistance lying at 1.3692. Near-term support comes in at 1.2981 ahead of 1.2737.
USDJPY BEARISH Bearish trend continues with focus on 84.83, break of which would expose next support at 81.85. Near-term resistance holds at 86.66 ahead of 88.12.
GBPUSD BULLISH Bull trend approaches 1.5969 Fibonacci level, with upside potential targets 1.6069 and 1.6458 next. Near-term support is at 1.5696 ahead of 1.5400.
USDCHF BEARISH Currently holds support at 1.0348 with near-term resistance at 1.0581 ahead of 1.0676. Overall focus on 1.0131; break of the level would expose 0.9918.
AUDUSD BULLISH Momentum is positive; expect the gains to target 0.9389 ahead of 0.9850. On the downside, initial support lies at 0.8896 ahead of 0.8634.
USDCAD BEARISH Negative trend eyes 1.0139; violation of the level would open up the way towards 0.9931 key low. Initial resistance is at 1.0274 ahead of 1.0396.
EURCHF BULLISH Need a break above 1.4041 to confirm the bullish trend. Initial support lies at 1.3730 ahead of 1.3511.
EURGBP BEARISH Outlook is bearish with focus on 0.8252 break of which would expose 0.8068 ahead of 0.7809. Near-term resistance lies at 0.8416 ahead of 0.8532.
EURJPY NEUTRAL Motion is sideways; 115.49 and 110.02 mark the near-term directional triggers. 107.32 defines a key support level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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