BoE unanimous, EUR soft, CAD focus on retail sales

Forex News and Events:

The economic data/events shift traders’ focus away from geopolitical tensions (at least in the short-run). In London, BoE’s unanimity for no policy action weighs on the GBP-complex. Across the Channel, EUR consolidates losses against USD and GBP. EUR/USD trades at fresh year-to-date lows while the negative correlation with EUR/CHF strengthens. Else, CAD traders are reluctant to push USD/CAD below 1.0700 before Canadian retail sales data due at 12:30 GMT today. The expectations are soft.

BoE’s unanimity weighs on GBP

BoE’s July meeting minutes displayed unanimous decision to keep the bank rate unchanged at the historical low of 0.50%. The MPC members voted nine-to-zero for no BoE action, yet minutes showed that some officials saw reduced risk in hiking rates. This is mostly due to sustainable recovery signs that UK has been sending via recent macroeconomic data. The UK economy is indeed heading towards a sixth consecutive quarter of economic growth, the unemployment rate stands at 6.5%, the lowest over the past 5.5 years. The significant progress shifts the focus to the timing of the policy normalization. While there is no sign of hawkish shift on bank rate action, the Quarterly Inflation Report due next month will bring more clarity on direction BoE may take. The overnight interest rate swaps on SONIA continue pricing in a BoE rate increase by the end of 2014.

The absence of concrete hawkish shift in the heart of the MPC suggests deeper downside correction in GBP/USD in the short-run. The key support levels are placed at 1.7000/07 (optionality / June 27th low), then 1.6922/23 (June 13/18 support). However the pair trades comfortably in the mid-range of year-to-date uptrend channel (1.6883-1.7356). The mid-run trend is not at risk.

EUR at year-to-date lows

The market reaction to soft US inflation reading has been somewhat interesting in EUR/USD. The US CPI ex-food and energy accelerated at the slower pace of 0.1% in month to June (vs. 0.2% exp. & 0.3% last), the CPI y/y (ex-food & energy) retreated to 1.9%. The G10 gave mixed reaction: USD sold-off against the antipodeans and the yen, yet gained versus EUR, GBP and CHF. The heavy selling pressures on EUR finally broke EUR/USD support at 1.3477 (former year-to-data low), taking the pair down to 1.3455 in the continuation of long-liquidation. Both technicals and fundamentals suggest the extension of softness moving forward. The next key support is placed at a distant 1.3296 (Nov 7th 2013 low).

The weakness in EUR/USD helps EUR/CHF holding ground. EUR/CHF hovers around its 21-dma (1.21500), ready to test May-July downtrend channel top (today at 1.21570). Important resistance is seen at this level, reinforced by decent option barriers in today’s expiry. Intensifying selling pressures in EUR/USD should keep the downside safe above 1.21350 (2-week ascending channel bottom) given the significant negative correlation between EUR/USD and EUR/CHF. The 40-day trailing correlation stands at -43% today.

The short-term correction in EUR/GBP sharply reversed, the pair extended losses towards its June-July downtrend bottom (0.78765). In the continuation of technical pattern formation since mid-June, we expect some upside correction once the bottom is hit. A breakout below the channel base should signal reinforced bearish trend in the short-run. Option barriers stand at 0.78750 for today expiry. Decent option related offers wait to be activated at 0.78000 pre-weekend.

Loonie traders wait for retail sales

Canada will publish May retail sales data at 12:30 GMT, the expectations are soft. The Canadian dollar traded on crowded wires over the past two weeks. The BoC’s dovish communication on policy with emphasis on temporary strong inflation, followed by stronger-than-expected June inflation report resulted in sharp swings in USD/CAD sentiment. The pair steadily grinds lower within 1.0697/1.0765 (21-dma/Mar-Jun declining triangle top). The bullish momentum slowly fades while traders remain reluctant on long CAD positions before retail sales data. Any negative surprise should lead to a breakout above the triangle top, placing 1.0794/1.0825 (50-200 dma) at risk.

Today's Key Issues (time in GMT):

2014-07-23T10:00:00 GBP Jul CBI Reported Sales, exp 15, last 4
2014-07-23T11:00:00 USD Jul 18th MBA Mortgage Applications, last -3.60%
2014-07-23T12:30:00 CAD May Retail Sales MoM, exp 0.60%, last 1.10%
2014-07-23T12:30:00 CAD May Retail Sales Ex Auto MoM, exp 0.30%, last 0.70%
2014-07-23T14:00:00 EUR Jul A Consumer Confidence, exp -7.5, last -7.5

The Risk Today:

EURUSD EUR/USD has broken the key support area defined by 1.3503 (see also the long-term rising trendline from the July 2012 low) and 1.3477, confirming an underlying downtrend. Hourly resistances can be found at 1.3513 (21/07/2014 low) and 1.3549 (21/07/2014 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. A strong support stands at 1.3296 (07/11/2013 low).

GBPUSD GBP/USD is in a corrective phase. The hourly support at 1.7039 has held thus far. A break of the hourly resistance at 1.7118 (18/07/2014 high) would improve the short-term technical structure. Another resistance stands at 1.7192, whereas another support lies at 1.7007 (see also the 38.2% retracement). 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 is moving sideways within the horizontal range defined by the support at 101.07 and the resistance at 101.86. The succession of lower highs and the recent inability to break the hourly resistance at 101.58 (intraday high) indicate persistent selling pressures. 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 the resistance at 0.9013 (16/06/2014 high) and is now challenging the key resistance at 0.9037 (see also the declining channel). Hourly supports can be found at 0.9001 (intraday low) and 0.8969 (17/07/2014 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 strong resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: