By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
FX price action was generally subdued during the Asia session, but the dollar clearly remains on the defensive after a series of weak US data reports yesterday, which markets see as bolstering the case for further Fed QE. USDJPY and USDCHF in particular remain heavy, and the risk of further intervention by Japan’s MoF is consequently growing. EURUSD traded 1.3556-1.3596, USDJPY 83.68-84.09. Equities registered some gains with the S&P500 closing +0.5% ahead. The S&P/Case Shiller composite 20 home price index dipped as expected to +3.18% y/y but the Conference Board consumer confidence figure and the Richmond Fed missed expectations. The Conference Board index fell to 48.5 vs. consensus 52.1 and the drop mostly reflected the expectations index rather than assessments of the present situation. Other confidence measures have been mixed in September.
Meanwhile, regional surveys, including the Richmond data, have suggested some slowing in manufacturing output growth, on balance, in September. Fed Governor Warsh alluded to the ongoing media debate about competitive devaluations noting that, while a weaker dollar would be good for US exporters, the willingness of foreign investors to invest in the dollar must also be protected. Atlanta Fed President Lockhart said that he does not expect deflation to develop, but also cautioned that “the risk of deflation cannot be dismissed”. Several other Fed officials, including 2011 voters Plosser and Kocherlakota, are due to speak today. The dollar remains under pressure from further easing concerns but several upcoming risk events in the Eurozone could keep EURUSD upside in check.
EUR
The euro had been under pressure heading into the New York session due to talk of potential Eurozone sovereign downgrades but the ECB’s Stark’s comment that the ECB is “in the process of phasing out some of the non-standard measures [of support]” helped it regain some ground and EURUSD then pushed higher following dovish BoE comments and US data.
A major rating agency had previously put Spain on review for a possible downgrade from AAA in June with a 3-month review process that comes to an end this week. Given that the other major agencies already have Spain at least one notch lower, it seems likely that the downgrade will go ahead this week. Concerns over Ireland remain, with another ratings agency suggesting it might cut the credit rating in the wake of concerns over a prominent Irish bank and wider issues over political instability. While dollar weakness is supporting EURUSD, sovereign concerns could provide a near-term cap, especially with a statement on a nationalized Irish bank and the expiry of the 12m ECB tender this week.
JPY
The Q3 Tankan was broadly in line with consensus and had no impact on the USDJPY. However, earlier the disappointing US data ensured that USDJPY stayed heavy.
Our Analysts team notes that the increase in the headline index – the large manufacturing business conditions index – reflected earnings improvement despite the rising yen.
GBP
BoE policymakers aired their differences over the newswires but investors focused on the more dovish Adam Posen’s comments. Posen advocated further monetary easing as he envisions CPI falling well below target. He said additional stimulus should begin in the form of additional QE gilt purchases and if that did not work, then it would be time for further fiscal stimulus and corporate debt purchases. Posen again stressed, though, that this was not a foregone conclusion.
Policymaker Sentance, the lone MPC dissenter, wrote in a paper that he sees no need to restart quantitative easing as it would give the wrong impression on the state of the economy. Neither policymaker said anything markedly different from their current positions but with the prospect of further Fed easing, investors are even more closely attuned to central bank comments.
TECHNICAL OUTLOOK
USDJPY focus back on 82.88.
EURUSD BULLISH Climb through 1.3511 yesterday exposes 1.3692. Near-term support comes in at 1.3381 ahead of 1.3287.
USDJPY BEARISH The break of 84.05 brings our focus back on the downside at 82.88. Resistance remains at 84.50 ahead of 85.40.
GBPUSD BULLISH Continues to trade higher; expected to target 1.5999 key high with scope for 1.6253 next. Support is defined at 1.5719 ahead of 1.5503.
USDCHF BEARISH Break of 0.9780 support exposes 0.9625. Resistance at 0.9983.
AUDUSD BULLISH There is little resistance till 0.9850 key high with initial support defined at 0.9559 ahead of 0.9463.
USDCAD BULLISH While support at 1.0192 holds, expect recovery towards 1.0509 and 1.0673.
EURCHF NEUTRAL Trading within 1.3391 and 1.2991 range. Break below 1.2991 would expose 1.2766 key low.
EURGBP BULLISH Sharp recovery yesterday held in front of 0.8606/0.8609 tough resistance area. Next resistance lies at 0.8736.
EURJPY BULLISH Momentum is positive; clearance of 114.74 would expose 116.68 and 119.33. Near-term support comes in at112.67 ahead of 110.66.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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