GBP Mitigated before Carney's Speech, EUR Sustained

Forex News and Events:

As the geopolitical concerns in Syria occupy the headlines worldwide, the emerging market currencies extend losses. Investors’ increasing appetite for risk haven assets rises demand in gold and silver, while EUR manages to defend strength against the US dollar despite German officials’ cold comments on the Greek situation.

Today’s key event is the BoE Governor Mark Carney’s speech at 12:45 GMT in Nottingham. In Brazil, the central bank is expected to increase the Selic rate from 8.50% to 9.00% to further support BRL.

Euro Benefits from EM flows

Euro remains well supported against USD and GBP; the EM inflows are perhaps among the leading euro-supportive factors. The emerging market currencies recorded heavy losses against Euro since July 9th where EURUSD rebounded from 1.2755 year lows, and that, on a sustainable bullish pattern. The Indian Rupee lost 15.60% vs. EUR, Indonesian Rupiah -14.13%, Turkish Lira -9.58%. Euro remains a strong alternative within G10 currencies, despite political and economic instabilities within the Euro-zone. In addition, the shrinking ECB balance sheet and the slower M3 money supply are euro-positive, as discussed in our previous reports. M3 money supply retreated from 2.4% to 2.2% in July, and slowed from 2.8% to 2.5% over the past three months, showed ECB data.

On the other hand, offers from Asian sovereign names are still solid at 1.3400/20, and cap the recent bullish attempts. Failures to break above 1.3400 hurt the bull-momentum in EURUSD, reinforced by German officials’ unsupportive comments on Greek situation. While German Finance Minister Schaeuble’s voiced that Greece will need more than EUR 10bn (estimated by IMF for 2014-2015), the Chancellor Angela Merkel said that “Greece shouldn’t have been allowed into the euro” during her election campaign in Rendsburg yesterday.

BoE’s Carney Speaks at 12:45 GMT

Mark Carney will give his first speech as BoE Governor at 12:45 GMT in Nottingham today. Mr. Carney is expected to reinforce his dovish view on the monetary policy, yet the markets are little convinced with the “forward guidance with inflation knock-out” framework and the Fed-like target on the unemployment to shape the policy in the future. Despite Mr. Carney dovish comments, traders’ reaction has not always been in the expected direction (remember August 7th GBP-rally post-BoE inflation report & Mark Carney’s dovish speech). The effectiveness of the new BoE policy is still a concern and seemingly not an easy one for Mr. Carney.

GBPUSD opened the week with negative bias and retreated below our 1.5500 (200-dayMA) bull-threshold. Carney’s speech is key in the afternoon and should trigger some price action. Technically, the MACD 12-26-day indicator stepped in the bearish zone and the GBP-bulls are losing field. The credibility and the market support to Mr. Carney are important in the afternoon. Despite dovish BoE expectations, the risk remains two-sided.

TRY: What to Expect?

Turkey Central Bank Governor Erdem Basci’s unexpected comments did not gather any bullish enthusiasm in the markets yesterday. Markets refused to buy Mr. Basci’s hawkish view on the monetary policy; too-unrealistic in our taste also. Traders and analysts now ask: what is the magical remedy of Mr. Basci to the rising inflation and the tumbling Turkish lira without hiking the benchmark rate from 4.50% nor lowering the FX reserves. Regarding the policy tools in hands today, the only possibility is to act on ROC (Reserve Option Coefficients) to reinforce the domestic lira demand and increase banks’ exposure to Turkish lira. Is it the best policy answer to the rising global bearish momentum vis-à-vis the EM currencies?

Today's Key Issues (time in GMT):

2013-08-28T11:00:00 USD MBA Mortgage Applications, last -4.6%
2013-08-28T12:30:00 CAD Jun Average Weekly Earnings y/y, last 2.5%
2013-08-28T14:00:00 USD Jul Pending Home Sales m/m, exp. 0.0%, last -0.4%
2013-08-28T14:00:00 USD Jul Pending Home Sales y/y, exp. 7.9%, last 9.1%

The Risk Today:

EURUSD FX volatility is picking up yet EURUSD is seeing little directional price action. EURUSD has been paused right under resistance region between 1.3420 to 1.3455 (last weeks high). In the mid-term, EURUSD indicators are marginally neutral , although MACD remains elevated above the zeroline. The sideways price action suggests a pull back to uptrend floor & 62% fibo retracement of the current rally (1.3330/40support). The next support can be found at 1.3335 (uptrend support), 1.3230 (13th Aug low & uptrend), 1.3161/90 (demand region), 1.3130 (65d MA), 1.2995 (10th July reaction high), 1.2963 (11th July low), 1.2877 (Fibonacci 50% retracement on Jul 12’ – Feb 13’ rally), then 1.2820 (20th May low). The first region of supply is located at a distant 1.3455 (14th Feb high), then 1.3520 (13th Feb pivot high).

GBPUSD is now challenging the 200 dma as bearish pressure continues to mount ahead of Mark Carney policy speech today. Despite the slightly bullish indicators 5-day of unrelenting selling has cleared most demand out of the way, suggesting further depreciation. Downside should be limited to 1.5373, the 38% retracement of the July/August rally & uptrend floor. The support levels from here are 1.5500 (200 dma), 1.5320 (65 dma), 1.5072/3 (4th July close & Fibonacci 23.6% on July 08’ – Jan 09’ drop), 1.5009 (29th May low), 1.4981 (9th July high), 1.4858 (July 5th reaction low), 1.4814 (9th July low), 1.4800 (psychological level). Watch for next resistance to come into play at 1.5600 (May resistance) , 1.5753 (17th June high), 1.5807 (11th Feb high), 1.5891 (21st Jan high), 1.6007 (18th Jan high).

USDJPY sell-off picked up momentum yesterday , on the back of Syria driven risk aversion (further helped by pullback in US yields) falling to 96.78. Trend and momentum indicators have flat lined providing little directional insight. Currently USDJPY is well contained within a growing triangle, so we anticipate a test of uptrend floor. The first resistance region is located at 101.50/68 (8th July high & Fibo lvl), 102.53 (29th May high),103.55 (16th Sep 08 & 30th Sep 08 low), then 105.00 (psychological resistance). On the downside, supports are located at 96.80 (sideways range top), 95.83 (6th June low), 93.57 (Fibonacci 61.8% on Sept 12’ – May 13’ rally), 92.56 (2nd Mar low & Fibo 38.2% retracement), 90.93 (25th Feb low).

USDCHF has sold-off to 0.9172 as safe-haven investors migrate into CHF. The move did not damage and key areas and is well within current sideways pattern. As stated yesterday downside should run into demand around 0.9128. The first levels of support remains at 0.9128 (13th June pivot high), then 0.9023 (31st Jan pivot low). The next levels of resistance are located at 0.9400 (25th July high), 0.9481 (range top), 0.9568 (fibo 61.8% on May-June drop), 0.9598 (11th July high), 0.9626 (31st May low & 3rd June low), 0.9672 (fibo76.4% level on May – June drop), 0.9763 (17th May high), 0.9842 (22nd May high), 0.9900 (psychological resistance).

Resistance and Support: