SNB focus squarely backed on the ECB

Forex News and Events:

The week starts with EUR-bears broadly in charge. EUR/GBP hit the fresh low as London walked in this morning; EUR/JPY rebounded from the daily Ichimoku cloud base. EUR-crosses should consolidate weakness walking into Thursday’s GDP and CPI readings. Geopolitical risks in Ukraine remain, although the first reaction to Easter Ukraine referendum gathered limited market reaction. In Switzerland, the retail sales recorded significant improvement in March. The Swiss franc weakens versus EUR and USD, while CHF is still subject to safe-haven inflows. With the ECB risk rising, the Swiss National Bank should play carefully to defend its 1.20 floor.

EUR: Thursday data is important

EUR/USD erased 1-month gains and closed last week below the MACD pivot (1.3840). The EUR-crosses continue pricing in a potential ECB action by June. Now that the short-term bearish trend is confirmed, we question how far can EUR/USD go? What are the key events and the major technical levels of this week?

First, we believe that the EUR trading should become significantly sensitive to economic data over the month ahead. If traders expect an ECB action by next month, solid reasons should give them reason to continue thinking so. Second, any improvement in Euro-zone’s micro and macro metrics places the EUR-bears at risk. Currently, EUR/USD consolidates weakness above 1.3741/49 (100-dma / Fibonacci 23.6% on April-May rally). There is no tension regarding the 30-day lower Bollinger band (1.3717), or the RSI at 42%. Technicals show no emergency for short-covering at the moment.

This Thursday, we will be closely monitoring the 1Q preliminary GDP and April final CPI figures across the Eurozone. The expectations are positive. The GDP growth is expected at 0.4% (vs. 0.2% prev), the April CPI should confirm progress in April (to 0.7% y-o-y from 0.5% in March). If data meets market expectations, the ECB doves should once again step in the sideways, thus giving opportunity to EUR-longs to jump back in the game. In the alternative case scenario, EUR/USD will be subject to decent option barriers trailing below 1.3750 until June 6th (next ECB meeting) and we will shift our focus to 200-dma (1.3621).

EUR/GBP hit the fresh low of 0.81551 as London walked in this morning. The decent morning rally in Cable is seen as trigger. The cross tests the 30-day lower BB on the downside (0.81646). The sentiment is comfortably bearish. Option related offers abound between 0.81500/0.81000 for the week ahead.

ECB challenge for the SNB

Swiss March retails sales real y/y jump higher than anticipated 3.0% vs. 1.9% exp. The larger jump came from subcategory Non-Food (ex-fuel) which rose 4.0% from 1.5%. This continues a strong recovery after late 2013 surprising drop and further evidence that the Swiss economy is heating up. While negative inflationary forces still exist, the slow grind higher in CPI should persist (ending current data plateau). Yet in regards to monetary policy setting, the SNB focus is now squarely backed on the ECB. Last week’s comments by ECB President Draghi suggesting possible policy action (specifically steering rates below zero), should force the SNB to deliver their own policy response. This now becomes a challenging environment for the SNB. With lower rates in Europe and lingering risk aversion, CHF should find further demand potentially putting pressure on the EUR/CHF 1.2000 floor. But with Switzerland already dangerously close to deflation combined with demand from safe-haven, non-yield influenced investors , the SNB will need a highly effective policy tool to make a real difference. And that can only mean one thing: a potential shifting of the floor to 1.2500. While this is a low probability event in our view the conditions are correct warrant such a courageous strategy.

Today's Key Issues (time in GMT):

2014-05-12T18:00:00 USD Apr Monthly Budget Statement, exp $114.0B, last $112.9B
2014-05-12T22:00:00 USD 1Q Mortgage Delinquencies, last 6.39%
2014-05-12T22:00:00 USD 1Q MBA Mortgage Foreclosures, last 2.86%

The Risk Today:

EURUSD has declined sharply after its bearish reversal near the key resistance at 1.3967. The support at 1.3780 has been broken. A key support lies at 1.3673 (see also the rising wedge). Resistances for a short-term rebound are given by 1.3812 (02/05/2014 low) and 1.3871 (intraday high). In the longer term, EUR/USD is still in a succession of higher highs and higher lows. However, the recent marginal new highs (suggesting a potential long-term rising wedge) indicate an exhausted rise. A break of the key support at 1.3643 (27/02/2014 low) is needed to confirm a long-term bearish trend reversal.

GBPUSD has weakened near the major resistance at 1.7043. Monitor the support at 1.6823 (02/05/2014 low), as a break would suggest persistent selling pressures. Another support can be found at 1.6763. Hourly resistances stand at 1.6916 (intraday low) and 1.6996. 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 1.6661 (15/04/2014 low) holds. However, we are reluctant to suggest an upside potential higher than the major resistance at 1.7043 (05/08/2009 high), especially given the general overbought conditions. Another resistance can be found at 1.7332 (50% retracement of the 2007-2009 decline).

USDJPY has bounced close to the key support area between 101.20 (03/03/2014 low) and 100.76 (see also the 200 day moving average and the rising channel). However, prices have thus far failed to hold above the hourly resistance at 102.01 (06/05/2014 high), suggesting a weak buying interest. Other resistances are given by the declining trendline (around 102.70) and 103.02. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.09) and the rising trendline from the 93.79 low (13/06/2013). A major resistance stands at 110.66 (15/08/2008 high).

USDCHF has moved sharply higher after the successful test of the key support at 0.8699. The resistance at 0.8862 has been breached. A key resistance stands at 0.8953. Hourly supports can be found at 0.8841 (02/05/2014 high) and 0.8802 (intraday low). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. However, a decisive break of the key resistance at 0.8930/0.8953 is needed to validate a bullish reversal pattern. We have raised the stop-loss of our long strategy.

Resistance and Support: