RBA Holds Rates at 2.50%

Forex News and Events:

RBA comfortable for now

As was widely anticipate the RBA left the cash rate unchanged at 2.50%. The RBA retained its neutral bias and reiterated forward guidancestating, “ the most prudent course is likely to be a period of stability in interest rates”. The central banks went on to worry about the effect of higher exchanged rate in light of lower commodity prices which would naturally help balance weaker spots in the economy. The RBA went on to acknowledge that recent rise in inflation was the result of a drop in AUD and improving wage growth should keep inflation around the 2-3% target. Finally the RBA stated that growth had been firmer than forecasted but should stabilize “little below trend” over the next year.To us this indicates that Friday Statement on Monetary Policy will lack any real adjustment to economic forecasts. The lack of adjustment to the forward guidance language suggests to us that rates should stay stable for the remainder of the year with hike coming in Q1 2015.There is a risk that growth in China drives, faster improvement in Australia, forcing the RBA to pull in there tightening schedule.

Central banks

With the US economic calendar very thin this week the market will be watching the four key central bank announcements due. In aggregate the market will need to see that the RBA, BoE, ECB and BoJ will remain committed to their loose monetary policy, before migrating back into risky assets. This confirmation should offset the negative effect of last week’s FOMC meeting and allow risk appetite to remain firm. Following the BoE Julys meeting minutes which were viewed as slightly more hawkish than expected, this week should be unlikely to reveal any change in policy. Ahead of August inflation report due on the 13th member will review incoming data for directional support. Yesterday UK construction PMI which came in at 62.4 vs. 62.6 suggest that recovery rally, still firmly in expansion territory, might be faltering. While PMI services should suggested activity pullbacks are just part of the natural gyrations in an economic recovery. Despite some recent disappointing reads the overall strong trend in economic data suggests to us that November rate hike is still on the table. Therefore we remain constructive on GBP and see the recent correction in GBPUSD as a good point to reload longs.

India Expected to hold for now

And on a final note, the Reserve Bank of India is anticipated to keep its policy rates unchanged at 8.00% today. The deceleration in inflation to 7.0% y/y should keep the RBI dovish (after a softer stance in June) and comfortable with current policy. Should the government enact much need supply side measures and inflation continues to trend lower we could see 25bp trimmed off by years end. From an FX perspective, we remains constructive on INR as the central banks will continue to intervene to normalize excessive volatility and flight from EM due to Fed policy should be delayed.

Today's Key Issues (time in GMT):

2014-08-05T06:00:00 CHF 2Q UBS Real Estate Bubble Index, last 1.22
2014-08-05T06:30:00 SEK Jul PMI Services, last 54.6
2014-08-05T08:00:00 EUR Jul F Markit Eurozone Services PMI, exp 54.4, last 54.4
2014-08-05T08:00:00 EUR Jul F Markit Eurozone Composite PMI, exp 54, last 54
2014-08-05T08:30:00 GBP Jul Official Reserves Changes, last $994M
2014-08-05T08:30:00 GBP Jul Markit/CIPS UK Composite PMI, exp 58, last 58
2014-08-05T08:30:00 GBP Jul Markit/CIPS UK Services PMI, exp 58, last 57.7
2014-08-05T09:00:00 EUR Jun Retail Sales MoM, exp 0.50%, last 0.00%
2014-08-05T09:00:00 EUR Jun Retail Sales YoY, exp 1.40%, last 0.70%
2014-08-05T13:45:00 USD Jul F Markit US Services PMI, exp 60.8, last 61
2014-08-05T13:45:00 USD Jul F Markit US Composite PMI, last 60.9
2014-08-05T14:00:00 USD Jul ISM Non-Manf. Composite, exp 56.5, last 56
2014-08-05T14:00:00 USD Jun Factory Orders, exp 0.60%, last -0.50%

The Risk Today:

EURUSD EUR/USD is bouncing within its underlying downtrend. Monitor the hourly resistance at 1.3444 (28/07/2014 high). A key resistance area stands between 1.3485 (24/07/2014 high) and 1.3503 (see also the 38.2% retracement and the declining trendline). A support can be found at 1.3367. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The 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 showed signs of buying interest yesterday after its relentless decline since mid-July. However, the hourly resistance at 1.6893 (01/08/2014 high) needs at least to be broken to suggest some exhaustion in short-term selling pressures. Another resistance can be found at 1.6928 (intraday high). An hourly support lies at 1.6814. 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 is consolidating after the successful test of the key resistance at 103.02. Monitor the support at 102.36 (18/06/2014 high, see also the 38.2% retracement). Another support can be found at 102.04 (30/07/2014 low). 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. Another resistance can be found at 104.13 (04/04/2014 high), while a major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF has weakened. However, the short-term bullish momentum remains positive as long as the support at 0.9035 (28/07/2014 low) holds. Another support can be found at 0.9008. An hourly resistance now stands at 0.9107. From a longer term perspective, the recent technical improvements call for 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. As a result, a test of the strong resistance at 0.9156 (21/01/2014 high) is expected.

Resistance and Support: