GBP Extends Strength, EUR Slides

Forex News and Events:

The fx trading is predominantly catalyzed by the idiosyncratic factors as the geopolitical risks and the potential attack plans to Syria have temporarily stepped down the headlines. The Australian dollar and the British pound were the biggest G10 winners against USD over the past 24 hours, euro continued its slide.

The global anxiety is however felt through the outflows from EM currencies. The Indian rupee lost 2.95%, while Turkish lira wrote-off 1.24% against USD since yesterday. The event risk is high and a potential tumbling in risk appetite should be monitored carefully.

Euro-Wrap

Euro losses ground despite improving economic data in the Euro-zone, the latest in focus being the manufacturing PMI. Indeed, the final data confirmed the expansion of Euro-zone’s manufacturing activity in August as the PMI advanced to its highest since 26 months. However, the unemployment remains at its record high level of 12.10% and the disinflationary pressures continue with persistently slowing growth in consumer prices. While the Greece is suspected to not be able to service its debt in fall, the need for a third bailout is suspected to exceed EUR 10bn estimated recently by the IMF. The German elections are due on September 22th, and to gather support and increase popularity, the current Chancellor Merkel does not refrain from saying that Greece should have never been allowed into EUR. According to Eurostat, the unemployment rate in Greece is at 62.90% for people under 25 years old, while German manufacturing PMI recorded a slight decline in August.

On the other hand, EUR remains somehow supported by the shrinking ECB balance sheet while Fed, BoE and BoJ continue to ease massively. Demand from the EM is unlikely to drain especially with the political and geopolitical uncertainties of the moment. And finally, the comments from ECB officials sound more hawkish despite the fragility of the recovery. The ECB President Draghi’s speech is expected with great curiosity on Thursday, after ECB’s monthly policy meeting.

Technically, repeated failures to break above the 1.3400/20 resistance and exogenous factors as EM buy/sell interest & Fed expectations send the euro to the bear-market this week. EURUSD trades below its lower deviation band. Light offers are building at the 50-dayMA, the recent support turns resistance. More offers are seen at 1.3300 & 1.3315 (21-dayMA), then 1.3400/20.

UK: Relentless Good News

After the inspiring manufacturing PMI print yesterday (Aug PMI Manufacturing: 57.2, vs. 55.0 exp. & 54.6 prev), the construction PMI data also made UK smile, with 59.1 reading in August versus 56.9 expected & 56.0 a month ago. GBPUSD spiked to 1.5603, last week highs, and is likely to challenge the topside on strengthening sentiment. The cable is still in the corrective zone, yet buying interest remains tight at 1.5480/1.5500. The long-legged Doji formation on Monday reinforces the expectations of a shift into a broader bullish trend. On the other hand, it is worth keeping in mind that the markets clearly doubt about these numbers being artificially bloated by the speculations and the speculative bubble in the UK housing market.

RBA: Status Quo

As widely expected, the RBA kept the policy rate unchanged at the historical low of 2.50%. The status quo was already broadly priced in, however the absence of the “scope for further easing” triggered a decent AUD-rally. AUDUSD hiked to 0.9048; the MACD 12, 26 day indicator sharply flattened. For a close above 0.9040, the momentum indicator will turn bullish. On the topside, the key technical resistance is placed at 0.9103/05 (Fibonacci 38.2% retracement on Aug 19th – Aug 30th drop & 50-dayMA), while stops are building above. While the intra-day sentiment is clearly positive, the risk of a short squeeze should be kept in mind. AUD and NZD have been the most hit G10 currencies vs. USD on the geopolitical jitters in Syria and the risks are only back-loaded to the next US Congress meeting (on Sept 9th).

Today's Key Issues (time in GMT):

2013-09-03T14:00:00 USD Jul Construction Spending m/m, exp. 0.4%, last -0.6%
2013-09-03T14:00:00 USD Aug ISM Manufacturing, exp. 54.0, last 55.4
2013-09-03T14:00:00 USD Aug ISM Prices Paid, exp. 51.6, last 49.0
2013-09-03T14:00:00 USD Sep IBD/TIPP Economic Optimism, exp. 46.0, last 45.1

The Risk Today:

EURUSD has had no problem falling to our near term target at 1.3160 as the bears showed up in decent size (4 consecutive down days). There is still noticeable demand located till 1.3140 (200dma), however with trend and momentum indicators pointing towards a deeper sell-off, keeping us bearish. The next support can be found at 1.3140 (200 dma), 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 has rallied to 1.5593, just a stone’s throw from key resistance, after long legged doji indicated a reversal. Trend and momentum indicators are marginally bullish combined with strong data suggests that current rally has legs to run. We would buy on dips as initial trigger level is at 1.5600 should lead to an rally extension to 1.5752 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). The support levels from here are 1.5507 (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).

USDJPY is running lock-in-step with our bullish expectations. Yesterday , USDJPY blasted through triangle top at 98.60 and strong demand triggered an bullish extension above daily cloud cover at 99.35. The activation of the USDJPYs symmetrical triangle is a clear continuation pattern suggesting a broad move to 105. However, in the short term we are targeting 101.48. The first resistance region is located at 100.00 (2nd Aug high), 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 extended bullish rally to 0.9376 as the risk aversion trade has slightly calmed down. The pair continues to trade in the sidelines, even though the risk of a short squeeze is high given the geopolitical jitters in Syria. Investors’ appetite for safe haven has weakened, yet not drained. We would need a break above 0.9400 to shift from our neutral bias. Bullish momentum has stretch slightly above daily Bollinger bands suggesting a slight correction. Downside should find support at 0.9349 (200-dma). The first levels of support remains at 0.9128 (13th June pivot high), then 0.9023 (31st Jan pivot low), 0.9000 (psychological support). 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) then 0.9672 (fibo76.4% level on May – June drop).

Resistance and Support: