FX driven by technicals pre-FOMC, NFPs

Forex News and Events:

The FX markets start the week in quiet fashion. Important data/event will drive the markets in the second half of the week; the US will be in the center of attention with second quarter GDP estimate and the FOMC decision on Wednesday, followed by July nonfarm payrolls and unemployment rate on Friday. The US 10-year government yields start the week below 2.50%, while DXY index consolidates at the highest levels over a month. While USD gives signs of recovery, the reluctance in US yields remains highly contingent on FOMC’s tenor. The Fed is expected to reduce its bond purchases by additional 10bn dollars per month, down to USD 25bn dollars.

According to implied probabilities extracted by Fed funds futures pricing, the probability of the first rate hike remains subdued until the second quarter of 2014. The Fed dots will be closely monitored to follow the hawk-dove dynamics in the heart of the FOMC.

Sharp increase in EUR-shorts

CFTC data showed an aggressive increase in EUR-short future positions through the week to July 22nd. The net speculative shorts confirm the negative sentiment in EUR, yet also increase the risk of a bullish reversal in case of setback in market sentiment. The EUR/USD path will mostly depend on data this week. Besides US data, the Euro-zone inflation and unemployment should be closely monitored. The CPI estimate for July is due on Thursday (July 31st) and will likely remain soft (CPI y/y seen at 0.5%, core CPI y/y at 0.8%). The real returns in EUR-denominated assets are still interesting due to low inflation dynamics. There is good demand in Euro-zone periphery bonds at the start of the week (except Portugal) as the ECB stimulus package continue pushing the most indebted countries’ yields lower. We expect EUR to remain ranged at the first half of the week. In EUR/USD, bids remain solid at 1.3400+, while offers line up above 1.3550 (July 21st high). Decent option related offers wait to be activated at 1.3400 for the week ahead, suggesting deeper downside correction in case of a negative breakout below 1.3400. The key support is set at 1.3296 (November 7th 2013 low). Traders should however be aware of the risk of a short-term bullish reversal due the oversold conditions in EUR/USD (RSI at 28%) and deeply short EUR speculative positions. In this context, offers are expected to limit rallies at 1.3565/91 (21/50 dma) region given the deep mid-run bearish sentiment. EUR/GBP trades comfortably in the mid-range of June-July downtrend band (0.78673/0.79633). The overall bias remains bearish as long as resistance at 0.79330/0.79633 (21-dma/downtrend channel top) holds.

Loonie in the bullish consolidation zone

The broad based USD strength helped USD/CAD clearing resistance at 1.0800 last Frida0; the pair consolidates gains in the bullish consolidation zone. The key resistance stands at the 200-dma (1.0832), while support is building at 1.0789/1.0800 (21-dma/optionality). The direction is mostly dependent on global USD appetite and the Canadian GDP report (due on Friday). The second half of the week should thus bring more clarity for short-term direction. We remain in the sidelines and closely monitor the 200-dma threshold, a significant break above suggests deeper upside correction.

Today's Key Issues (time in GMT):

2014-07-28T13:45:00 USD Jul P Markit US Composite PMI, last 61
2014-07-28T13:45:00 USD Jul P Markit US Services PMI, last 61
2014-07-28T14:00:00 USD Jun Pending Home Sales MoM, exp 0.20%, last 6.10%
2014-07-28T14:00:00 USD Jun Pending Home Sales YoY, exp -5.00%, last -6.90%
2014-07-28T14:30:00 USD Jul Dallas Fed Manf. Activity, exp 12, last 11.4

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 (03/02/2014 low), confirming an underlying downtrend. Hourly resistances can be found at 1.3485 (24/07/2014 high) and 1.3513 (21/07/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. Downside risks are given by 1.3379 (implied by the double-top formation) and 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A resistance lies at 1.3549 (21/07/2014 high).

GBPUSD GBP/USD is in a corrective phase. However, prices are now close to a significant support area between 1.6953 and 1.6923, which should cap short-term downside risks. An initial resistance lies at 1.6998 (25/07/2014 high). Hourly resistances can be found at 1.7054 (24/07/2014 high, see also the declining channel) and 1.7118 (18/07/2014 high). 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). We have updated our long strategy.

USDJPY USD/JPY has breached the resistance at 101.86 (see also the declining channel). Hourly supports can be found at 101.72 (25/07/2014 low) and 101.60 (22/07/2014 high). Other resistances stand at 102.27 (03/07/2014 high) and 102.36. 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 key resistance at 0.9037, suggesting persistent buying interest. Hourly supports can be found at 0.9031 (intraday low) and 0.9001 (intraday low). Another resistance lies at 0.9082 (03/02/2014 low). From a longer term perspective, the bullish breakout of the key resistance at 0.8953 (04/04/2014 high) 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. Furthermore, a break of the resistance at 0.9037 would favour a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. A strong resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: