GBP-unwind on poor production data, US waits for earnings

Forex News and Events:

The UK production heavily missed the market estimates in May, thus triggered a decent GBP-unwind in London. The weakness in German trade terms keep the appetite limited in EUR-bulls. Walking into the US session, we expect the continuation of low trade volumes as the earnings season anxiety limits the risk appetite. The technicals are likely to remain the key driver throughout the day. The earnings season will start with Alcoa results after US’ closing bell today and will shift traders’ motivation toward event/data from early week technicals. The Fed minutes are due tomorrow, while Wells Fargo results will be in focus on Friday.

UK production data missed estimates

The industrial and manufacturing production unexpectedly contracted in May (-0.7% m/m and -1.3% m/m respectively), data showed in London today. As knee-jerk reaction, GBP/USD traded below 1.7100 for the first time since June 30th, breaking the steep uptrend channel base building since mid-June. We see a short-term top formation in the Cable daily chart, technical indicators flatten. A daily close below the 21-dma (also matching MACD pivot) will suggest deeper downside correction. If however the losses remain soft, GBP/USD will face decent option bids at 1.7000 with July 10th (BoE day) expiry to cap the downside before the week ends.

EUR/GBP hiked to 0.79597 post-UK data. A daily close above 0.79610 will send the MACD in the positive territories, thus suggesting further upside correction. However, we believe that the selling pressures on EUR should keep the upside limited at 0.79912/0.80000 (21-dma / optionality) as uncertainties on EUR direction persists. Decent option barriers stand at 0.80000 through the end of the week to July 11th.

The US earnings season begins

Low volumes should keep the G10 trading ranged in the absence of leading news in US. The US traders are sidelined as earnings season anxiety keeps them away from betting on fresh directions. The post-NFP gains are being retraced. The technicals are likely to remain in the driver sit throughout the day. The earnings stream will start with Alcoa results after US close today; Wells Fargo – US’ leading mortgage lender, will be in focus on Friday. European session pulled US 10-year yields back below 2.60%.

In the second quarter, traders pushed US stocks to record high levels expecting a rebound after the decline recorded in the first quarter and mostly believed to be due to harsh winter conditions in the US. However, the expectations for 2Q earnings stand at lowest levels since 2011. There is certain insecurity: what-if the earnings miss the soft expectations?

Follow up with the franc

Disappointment is what we saw in Switzerland as May retail sales unexpectedly contracted by -0.6% and the inflation figures stepped in the negative territories in June. The CPI m/m decelerated by -0.1%, pulling the yearly CPI down to flat (0.0%). Swiss markets gave little reaction to soft data certainly because the weak inflation readings do not modify SNB expectations at this stage. USD/CHF tests the 200-dma (0.8948) on the upside, a breakout above this level should refresh attempt toward June high levels (0.9037). Yet given the subdued pressures on CHF, the USD-leg is clearly the main driver. The important event-risk in US (Fed minutes, corporate earnings) can reverse the technical tendencies after US close today.

EUR/CHF is less sensitive to US news. The pair shortly spiked down to 1.21496 on soft CPI. Yesterday close just below our 1.21600 threshold strengthens our short-term view on the upside. The next resistance stands at 1.21800 (May-June downtrend top), if broken will signal deeper upside correction in EUR/CHF. This view is also in line with our lower EUR/USD expectations.

Today's Key Issues (time in GMT):

2014-07-08T11:30:00 USD Jun NFIB Small Business Optimism, exp 97, last 96.6
2014-07-08T14:00:00 GBP Jun NIESR GDP Estimate, last 0.90%
2014-07-08T14:00:00 USD May JOLTS Job Openings, exp 4350, last 4455
2014-07-08T19:00:00 USD May Consumer Credit, exp $20.000B, last $26.847B

The Risk Today:

EUR/USD made a bullish intraday reversal yesterday, suggesting a potential short-term bounce. Hourly resistances stand at 1.3621 (intraday high) and 1.3664 (03/07/2014 high). However, an eventual decline towards the support at 1.3503 remains favoured. An hourly support can be found at 1.3565 (20/06/2014 low). In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. A long-term downside risk at 1.3379 (implied by the double-top formation) is favoured as long as prices remain below the resistance at 1.3775. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBP/USD has broken the major resistance at 1.7043 (05/08/2009 high). A short-term bullish bias is favoured as long as the hourly support at 1.7096 (01/07/2014 low, see also the short-term rising trendline) holds. Another support lies at 1.7007 (27/06/2014 low). An hourly resistance now lies at 1.7177. In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A support lies at 1.6923 (18/06/2014 low).

USD/JPY has weakened near the resistance at 102.36 (18/06/2014 high), breaking the hourly support at 101.97 (04/07/2014 low). Monitor the hourly support at 101.65 (intraday high, see also the 61.8% retracement). Another support can be found at 101.24. An initial resistance now lies at 101.97 (04/07/2014 low). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. A break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF has thus far failed to break the resistance implied by its declining channel (around 0.8959). Another resistance lies at 0.8975. Hourly supports can be found at 0.8926 (intraday low) and 0.8886 (intraday low). From a longer term perspective, the bullish breakout of the key resistance at 0.8953 suggests the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. A key resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: