Brazil maintains status quo as Yellen declines to deliver more precision

Forex News and Events:

In the second day of her semi-annual testimony before the Financial Stability Committee, the FOMC Chair Yellen declined to specify timing for the first rate hike as well as any mathematical rule which would limit FOMC’s freedom of decision. The USD-appetite curbed, while the US-10 year yields failed to pick-up momentum on the upside. The Fed schedule remains vague in the short-run giving the Brazil Central Bank the opportunity to take a breather by keeping its Selic rate unchanged at 11.00%. In the Euro-zone, the inflation met the market expectations by raising 0.1% through month to June. The headline and core CPI y/y remained unchanged at 1.8% and 1.5% respectively. EUR/USD gave little reaction to data; a tweezer bottom formation will be confirmed for a daily close above 1.3521.

Yellen declines to deliver timing for the first rate hike

The appetite in USD decelerates as FOMC Chair Yellen declines to specify timing for the first Fed rate hike. The main exit tool would be the IOER (interest rate on excess reserves) rise, said Yellen in the second day of her semi-annual testimony before the Financial Stability Committee, with limited flexibility on use of RRP to insure financial stability. She insisted on the fact that no mathematical formulas should be set to conduct Fed’s policy as such rules would be a “grave mistake” and would only limit Fed’s independence. No mathematical rules means no visibility on the Fed policy outlook: the ongoing uncertainties and resulting speculations are likely to keep the direction confused for some more time. The 1-month libor curve remains flat until the end of 2014 and steepens from the beginning of 2015 confirming the market expectations of higher Fed rates in 2015. The treasury curve however declines on the back-end, the US 10-year government bonds fail to pick-up momentum.

Brazil’s Selic rate is kept unchanged

The Brazil Central Bank keeps its Selic rate stable at 11.00% for the second straight meeting, after nine consecutive rate hikes from April 2013 in anticipation of Fed’s policy normalization. Now that the Fed keeps its cautious policy stance, the Brazil’s status quo appears to be the right decision given the concerns on rising inflationary pressures. The CPI advanced to 6.52% in year to June, crossing slightly above the central bank’s target range of 2.50-6.50%. The BCB Governor Tombini said in July 1st that the tightening in the policy didn’t result in a slowdown in consumer prices. Now it is time to wait-and-see the impacts of the rate increases (from 7.25% in April 2013 to 11.00% currently). With comfortable sentiment vis-à-vis the Fed communication and the actual carry-interest still supporting the BRL, there is no need to jeopardize the economic recovery. The GDP growth in Brazil decelerated to 0.2% in the first quarter (from 0.7% q/q previously), pulling the GDP y/y down to 1.9% (from 2.0% prev).

EUR/USD: A tweezer bottom formation?

Daily candle patterns analysis will confirm the formation of a tweezer bottom if EUR/USD closes the day above yesterday low of 1.3521 (which matches the intraday low at the time of writing). The overall bias remains negative, yet an upside correction is likely given that the pair approaches the oversold territories (RSI at 37% and 30-day lower Bollinger band at 1.3515). The key support zone stands at 1.3477/1.3503 (2014 low/June 5th ECB reaction low). On the upside, today’s option offers are eyed at 1.3550/80 region.

Today's Key Issues (time in GMT):

2014-07-17T12:30:00 CAD May Int'l Securities Transactions, exp 5.00B, last 10.13B
2014-07-17T12:30:00 USD Jun Housing Starts, exp 1020K, last 1001K
2014-07-17T12:30:00 USD Jul 12th Initial Jobless Claims, exp 310K, last 304K
2014-07-17T12:30:00 USD Jun Housing Starts MoM, exp 1.90%, last -6.50%
2014-07-17T12:30:00 USD Jul 5th Continuing Claims, exp 2580K, last 2584K
2014-07-17T12:30:00 USD Jun Building Permits, exp 1035K, last 991K, rev 1005K
2014-07-17T12:30:00 USD Jun Building Permits MoM, exp 3.00%, last -6.40%, rev -5.10%
2014-07-17T14:00:00 USD Jul Philadelphia Fed Business Outlook, exp 16, last 17.8

The Risk Today:

EURUSD EUR/USD declined further yesterday. Prices are now close to the key support at 1.3503 (see also the long-term rising trendline from the July 2012 low). Hourly resistances can be found at 1.3562 (15/07/2014 low) and 1.3581 (intraday high). 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 1.3700. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBPUSD GBP/USD has thus far failed to break the resistance at 1.7180, favouring further consolidation. Hourly supports can be found at 1.7110 (61.8% retracement of yesterday's rise) and 1.7060. 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).

USDJPY USD/JPY has faded near the resistance at 101.86 (09/07/2014 high). Monitor the test of the hourly support at 101.44 (15/07/2014 low). Another support lies at 101.07. A key resistance stands at 102.36 (see also the declining trendline). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, 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).

USDCHF USD/CHF has broken a key resistance area between 0.8959 (07/07/2014 high) and 0.8975 (20/06/2014 high). Another key resistance area stands between 0.9013 (16/06/2014 high) and 0.9037 (see also the top of the long-term declining channel). Hourly supports can be found at 0.8955 (16/07/2014 low) and 0.8938 (09/07/2014 high). 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 strong resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: