Aussie gains on CPI expectations above RBA's target band

Forex News and Events:

As traders are back from Easter holidays, the FX activity slowly picks up. The persistence in EUR strength raises discussions on a “more likely QE”, while we still don’t see active pricings for such eventuality yet. April 15th CFTC data showed recovery in speculative EUR-long positions last week (despite Draghi’s QE threats). In UK, the Cable consolidates gains. BoE minutes are due on Wednesday; EUR/GBP approaches our mid-target. In Australia, the Aussie broadly gains as CPI expectations in Q1 are above RBA’s target band. The April preliminary Chinese manufacturing PMI, due overnight, is also in focus of AUD-traders.

Euro holds ground, upside still in peril

Although the markets do not effectively price in ECB threats on QE, the upside attempts are naturally subdued. It is one thing to believe that ECB will not act; while it is fully another issue to take the ECB’s policy risk. As markets question the next steps from the ECB (without actively buying/or selling ideas), the central bank will be constrained to act at some point given that words are no more sufficient to mobilize traders towards a desired direction. This is perhaps what keeps the EUR upside limited, rather than Draghi’s will to see markets building an effective EUR-ceiling.

Another question is where Draghi sees the EUR-ceiling. In our previous reports, we have mentioned that some leading banks do not anticipate action unless EUR/USD reaches 1.5000 (2011 highs). Extending the analysis chart to 2011, EUR/USD trades at about Fibonacci 61.8% level (1.3833) on the latest significant drop of 2011-2012. There is still room on the upside yet is the ECB risk worth to be taken?

Given the important divergences in the heart of the Euro-zone, the ECB’s steps should be carefully justified. This is why; the markets do not see reason to rush into EUR-shorts especially given the fragile character of bearish euro trends over the past year. We believe ECB is likely to first revise down its midterm inflation outlook in June, and then proceed with concrete action. On a side note, ECB still has the possibility to cut the main repo & deposit rates, suspend the SMP drain and LTROs. At the moment, the deflation fears continue outweighing the ECB doves, yet the upside remains at risk.

EUR/USD rebounded from 1.3785 (slightly higher than Fib support at 1.3781) as Europe walked in post-Easter holidays. The key short-term resistance is placed at 1.3833 (Fib 61.8% on 2011/2012 drop), more offers should face the option bids trailing above 1.3900 with today and tomorrow’s expiry. EUR/GBP is heading towards our target at 0.82042 (March 5th low). The support zone is placed at 0.81828 / 0.82000 (30-day lower BB / psychological support). Option barriers for today are seen at 0.82200/0.82400.

Will the Australian CPI break above RBA’s target band?

The Australian 1Q CPI figures are due on Tuesday. The markets expect faster acceleration in consumer prices at 3.2% y-o-y, versus 2.7% a quarter ago. The Reserve Bank of Australia holds its neutral bias at the moment (despite discontent of Treasurer Hockey) on steady CPI expectations at about the target band over the next two years. The RBA’s average annual inflation target band stands at 2-3%. If market expectations are met, the above-target CPI should increase upside pressures on rates, thus boosting AUD-bulls.

Today's Key Issues (time in GMT):

2014-04-22T12:30:00 CAD Feb Wholesale Trade Sales MoM, exp 0.70%, last 0.80%
2014-04-22T13:00:00 USD Feb FHFA House Price Index MoM, last 0.50%
2014-04-22T14:00:00 USD Apr Richmond Fed Manufact. Index, last -7
2014-04-22T14:00:00 USD Mar Existing Home Sales, exp 4.55M, last 4.60M
2014-04-22T14:00:00 USD Mar Existing Home Sales MoM, exp -1.10%, last -0.40%
2014-04-22T14:00:00 EUR Apr A Consumer Confidence, exp -9.3, last -9.3

The Risk Today:

EUR/USD has thus far unable to catch a proper bid the mid-term uptrend defines. Therefore, in the short term is moving within a falling channel. An hourly support is at 1.3780 (09/04/2014 low, see also the low of the declining channel). The next resistance is at 1.3731 (21/04/2014 high). The short-term technical configuration remains positive as long as the support at 1.3730 holds In the longer term, EUR/USD is still in a dominate uptrend, suggesting additional upside can be anticipated. A significant resistance now lies at 1.3876 (24/03/2014 high).

GBP/USD has breached the fibo level at 1.6823. A solid break above would validated a short-term bullish trend reversal formation. The next resistance can be found at 1.7043 (11/11/2011). The short-term bullish momentum is intact as long as the hourly support at 1.6684 (previous resistance) holds. In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. A major resistance stands at 1.7043 (05/08/2009 high).

USD/JPY has breached the resistance at 101.20. As long as the hourly support at 102.37 (old basing pattern) holds, a further short-term rise is favoured. Hourly resistances are at 102.83 (21/04/2014 high) then a distant 104.13 (04/04/2014 high) A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.80) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013)) holds. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF bearish pause quickly reversed and is now is moving within a short-term rising channel. Resistance can be found at 0.8930 (04/04/2014 high). Monitor the hourly support at 0.8745 (12/02/2014 low). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures and a potential base formation. A decisive break of the key resistance at 0.8930 would open the way for further medium-term strength.

Resistance and Support: