UK Growth Disappoints, US Debt Limit Worries

Forex News and Events:

The currency markets trade on crowded wires. The renewed discussions on Japan corporate and sales taxes, the concerns on US debt/budget deadlines, and the disappointing UK growth have been the major catalyzers in the morning. The risk appetite is poor, GBP and EUR trade with negative intra-day bias while the jitters around US budget constraints weigh on US sovereign yields.

Markets will remain focused on 2Q US economic data, while the Congress is expected to vote on Friday to increase US debt limit.

GBP Hit by Growth Report

The cable took a dive as UK printed weaker-than-expected GDP growth in the second quarter (0.7% QoQ as expected, yet 1.3% YoY versus 1.5% expected), the total business investment contracted 8.5% in 2Q. As immediate reaction, GBPUSD sold-off 60 pips, the positive momentum further weakened. As widely known, there is a significant divergence between the market behavior and Carney’s forward guidance/ inflation knock-out framework. So far, financial markets have been betting that the UK recovery will continue, eventually forcing the BoE to abandon threats for additional asset purchases. The key risk to forward guidance has always been the credibility, and we are curious to see if today’s disappointment on 2Q growth will build empathy on Carney’s reluctance to exit the loose policy while the recovery is still fragile.

Jitters around US debt ceiling

The US Treasury Secretary Lew said yesterday that the US government will reach the debt ceiling by October 17th, meaning that if no action is taken, the US government will be subject to default risk while to prioritize the government payments on others would only shift this risk. All eyes are on the Congress now, expected to vote a ceiling increase on Friday to release the ongoing tensions.

In the market place, players look back to Aug 2011 deadline on debt ceiling, the significant drop in treasury yields despite resolution, the US downgrade and extrapolate. The current 3-month US T-Bill yield remains at the lowest levels (0.0100% today, slightly above 0.0075% seen post-FOMC) while the 10-year government yield hit 2.0600% in New York for the first time since August 12th. The key level in 10-year yields remains 2.50% - August low, if broken should signal further lows as debate on debt/budget & uncertainties in Fed policy persist. The post-FOMC dollar unwind is slowly leaving its place to new dynamics based on the safe-haven USD, building pressure on risk currencies (EM, commodity currencies ahead).

Swiss franc: Strong

There is a malaise around Swiss monetary policy. Recent monetary policy assessment was uneventful and failed to indicate any change. SNB’s Jordon recently reinforced the verbiage around the EURCHF minimum exchange rate by saying the CHF cap is ‘indispensable’, yet the expectations for removal are building alongside with improving growth numbers in Switzerland and CPI trending higher. In the past there has been plenty of rumor, speculation and hype that a potential increase in the floor was imminent. And this forced CHF selling. However, in the current environment the next decision might be for shift in policy, especially considering the frothiness in the housing market. Switzerland economic outlook isn’t yet clear of deflationary prospects which make the scenarios of the SNB signaling any policy change premature. However, it begs the question of when is the right time to begin pricing in a more normalized policy. Most analysts expect a weaker CHF on international and Swiss investors rotating out of the safe haven nation. However we are not so quick herald the CHF demise. We suspect long term investors have gotten comfortable safe currency in their portfolio and the potential interest rate kicker will make its purchase more appealing.

Today's Key Issues (time in GMT):

2013-09-26T12:30:00 USD Sep 21th Initial Jobless Claims, exp.325K, last 309K
2013-09-26T12:30:00 USD Sep 14th Continuing Claims, exp. 2,818K, last 2,787K
2013-09-26T12:30:00 USD 2Q(T) GDP Annualized q/q, exp. 2.6%, last 2.5%
2013-09-26T12:30:00 USD 2Q(T) Personal Consumption, exp. 1.9%, last 1.8%
2013-09-26T12:30:00 USD 2Q(T) GDP Price Index, exp. 0.8%, last 0.8%
2013-09-26T12:30:00 USD 2Q(T) Core PCE q/q, exp. 0.8%, last 0.8%
2013-09-26T14:00:00 USD Aug Pending Home Sales m/m, exp. -1.0%, last -1.3%
2013-09-26T14:00:00 USD Aug Pending Home Sales y/y, exp. 6.3%, last 8.6%
2013-09-26T15:00:00 USD Sep Kansas City Fed Manf. Activity, exp. 8, last 8

The Risk Today:

EURUSD has reversed above 1.3455 support further strengthening a potential bullish flag formation (continuation pattern). We believe the minor correction of overbought conditions should be viewed as a healthy unwind and an opportunity to reload on longs (down to 1.3400). With MACD firmly over the zero-line, trend and momentum indicators bullish and uptrend stable, our focus is on 1.3610. The first region of supply is located at a distant then 1.3569 (19th Sept high), 1.3610 (6th Feb high) then 1.3710 (2013 high). The next support can be found at 1.3480 (22nd Sept low), 1.3320 (17th Sept low), 1.3106 (6th Sept low), 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).

GBPUSD has caught a slight bid rallying to 1.6092, above our trigger at 1.6068, and looks to be ready to retest the 1.6163 top. With GBPUSD comfortably in a expanded uptrend channel , thin supply zones above and momentum indicators in bullish territory we remain bullish. We would buy on dips, with our next target 1.6179 then 1.6343. Watch for next resistance to come into play at 1.6179 (11th Jan high), 1.6343 (2013 high). The support levels from here are 1.5956 (24th Sept pivot low), 1.5884 (17th Sep low), 1.5759 (17th June high), 1.5600 (resistance turned support),1.5478 (200 dma), then 1.5468 (65 dma).

USDJPY staged a solid bullish reversal to 99.13 but need to clear 99.68 for us to feel less cautious over our bullish call. That said, its a move in the right direction and we remain bullish as MACD remains above the zeroline and momentum indicators have crossed higher. In the mid-term we are still targeting 101.48 (but 100.68 would be our first target). The first resistance region is located at 100.68 (11th Sept 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 98.28 (reversal base), 97.86 (daily cloud cover), 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 completed its short –term recovery rally by stalling below 0.9131/39 resistance. With MACD in bearish territory and momentums indicators point lower we see this bullish retracement as a logical breather after the aggressive Sept 18th sell-off. We remain bearish and will watch for a break of 0.9087 to trigger an extension of weakness. We are focused on 0.9023. The first levels of support remains at then 0.9086 (23rd Sept low), 0.9023 (31st Jan pivot low), 0.9000 (psychological support). The next levels of resistance are located at 0.9131/40 (18th Sept low), 0.9450 (target), 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: