EUR inflation shifts lower, USD strong

Forex News and Events:

The enthusiasm vis-à-vis the US recovery lifts the FX volatilities from the past 10-year lows, while the high yielding EM currencies accumulate losses. The Argentinian default certainly doesn’t help to lift the sentiment in the emerging world. In the Euro-zone, the low inflation and high unemployment further weighs on the single currency. The headline EZ inflation estimate in July fell to 0.4%, boosting ECB-doves. The dovish ECB expectations keep the peripheral bond demand tight (and thus the euro); yet the corrective EUR/USD bids are likely to fade as the greenback stays in demand walking into the US jobs data before the weekly closing bell.

No fireworks out of the FOMC meeting

As widely expected, the Fed decided to keep its rates unchanged and reduced its monthly bond purchases by an additional (regular) 10 billion dollars. The accompanying statement remains highly accommodative as the good NFP numbers and lower unemployment are not sufficient to conclude on healthy labor market. Regarding the inflation however, we notice a slight shift from the last meeting tone. The FOMC states that the inflation is moving “closer to long-run target”, versus “below” the objective as previously said. Should the improvement in US inflation continues, this latter issue will certainly oblige Fed to reconsider its dovish stance.

The markets continue pricing the first rate hike by the second quarter of 2015. The FOMC Chair Yellen should keep highlighting the importance of job-skill mismatches, the high level of part-time jobs as well as the slow wage growth to justify the low US rates during “considerable time” after APP ends. The jobs data (jobless rate, NFPs and income) are due on Friday, the expectations remain ranged.

Flight out of the high yielding EMs

The carry-interesting EM currencies’ sell-off gained further traction after the good US data and the FOMC’s cautious comments on the US inflation. As the Fed approaches the policy normalization and the hawkish speculations get louder, the downside volatility in high yielding EM currencies should increase steadily. The Turkish lira wrote-off nearly 1.50% versus USD since Monday, closely followed by the South African Rand (-1.10%) and the Brazilian Real (-1.04%). Traders’ cautious stance versus EM countries with fragile macro fundamentals should gain field. The forgotten Fragile Five (Turkey, Brazil, South Africa, India and Indonesia) is seen as the first danger zone.

EUR/USD grinds lower

The deflationary fears in the Euro-zone, combined to the recent pick-up in USD appetite, weigh on EUR/USD. The supportive US data yesterday pushed EUR/USD down to 1.3367 for the first time since 12th November 2013, the negative momentum strengthened. Minor corrective bids keep the bearish attempts limited due to deepening oversold conditions (RSI at 23%, 30-day lower BB at 1.3384). The soft Euro-zone economic data (low inflation dynamics and high unemployment despite slight improvement to 11.5% in June) sustain the dovish ECB expectations, but also boost speculations for more stimulus. The ECB-dovish view reinforce demand in Euro-zone peripheral bonds and gives some support to EUR/USD. The bias however remains comfortably negative. Option barriers trail above 1.3400/50+ before the weekend.

Today's Key Issues (time in GMT):

2014-07-31T11:30:00 USD Jul Challenger Job Cuts YoY, last -20.20%
2014-07-31T12:30:00 USD 2Q Employment Cost Index, exp 0.50%, last 0.30%
2014-07-31T12:30:00 CAD May Average Weekly Earnings YoY, last 3.30%
2014-07-31T12:30:00 CAD May GDP MoM, exp 0.40%, last 0.10%
2014-07-31T12:30:00 CAD May GDP YoY, exp 2.30%, last 2.10%
2014-07-31T12:30:00 USD Jul 26th Initial Jobless Claims, exp 300K, last 284K
2014-07-31T12:30:00 USD Jul 19th Continuing Claims, exp 2492K, last 2500K
2014-07-31T13:00:00 USD Jul ISM Milwaukee, exp 61, last 60.57
2014-07-31T13:45:00 USD Jul Chicago Purchasing Manager, exp 63, last 62.6

The Risk Today:

EURUSD EUR/USD is in an underlying downtrend. However, monitor the support at 1.3367 implied by yesterday's intraday bullish reversal (hammer formation). Hourly resistances can be found at 1.3444 (28/07/2014 high) and 1.3485 (24/07/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The downside risk implied by the double-top formation (1.3379) has been met. However, another downside risk is given by 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 key resistance lies at 1.3549 (21/07/2014 high).

GBPUSD GBP/USD has broken the key support at 1.6923. However, prices are now close to the support implied by its rising channel (see also the 61.8% retracement). Coupled with the overextended decline and the underlying uptrend, we favour a rebound in the next few days. Hourly resistances can be found at 1.6955 (30/07/2014 high) and 1.7001 (see also the declining channel). 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 key support stands at 1.6693 (29/05/2014 low).

USDJPY USD/JPY surged higher yesterday, breaking the resistance area defined by 102.27 (03/07/2014 high) and 102.36. Prices are now challenging the key resistance at 103.02. An hourly support stands at 102.36 (previous resistance). 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 continues to move higher, as can be seen by the break of the resistance at 0.9082 (03/02/2014 low). A key resistance stands at 0.9156. Hourly supports can be found at 0.9065 (30/07/2014 low) and 0.9035 (28/07/2014 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, the break of the resistance at 0.9037 calls for 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: