EUR deflation worries, Cable hits 200-dma

Forex News and Events:

The FX traders are focused on economic events/data, as geopolitical tensions de-escalate. Additional softness in Japanese data continues weighing on JPY. In UK, the quarterly Inflation Report pulls the Cable towards its 200-dma for the first time in one year. The BoE Governor Carney’s concerns about the slack in wage growth keeps the BoE hawks contained. It is not the right time to begin rising rates, says Carney, reinforcing GBP/USD sell-off within the oversold territories. In the Euro-zone, German 2Q growth data falls behind France. The CPI contracts 0.7% (vs. -0.6% exp. & +0.1% last) in month to July.

Euro-zone news

Soft data keeps EUR-bears in charge. Released in the morning, the 2Q preliminary data showed that German GDP contracted 0.2%, thus falling behind France’s 0.0% print. The Euro-zone composite GDP remains flat (0.0%) in 2Q preliminary reading, the consumer prices turn negative (-0.7%) in month to July. The FX reaction remains mixed; buyers on deflationary formation confront the ECB-doves. The mid-run sentiment remains firmly negative.

In the short-run, we see strong EUR/USD support at 1.3296/1.3333 (Nov 2013 low/Aug 6th low). The bears are likely remain timid for a daily close above 1.3345 (MACD pivot). Solid resistance is eyed at 1.3400/25 region (optionality/21-dma).

EUR/GBP extends gains above 0.80000 on broad GBP weakness. Given the fundamental divergence between ECB/BoE, we see the upside attempts as opportunity to strengthen our bearish pose.

Slack in wage growth worries

The UK jobs report disappointed as wages contracted by 0.2% in average over three months to June. As expected, the 3-month unemployment rate retreated to 6.4% according to ILO and the claimant count eased to 3.0% in July signaling the continuation of progress from a quantitative point of view. As the strengthening job market fails to lift the average wage levels, the BoE and Carney’s focus shifts to earnings (as Yellen’s in the US). The hawkish BoE expectations attenuate as the annual wage growth forecasts are revised significantly down from 2.5% (May forecast) to 1.25%. Carney takes no risk this time, and makes it clear: there is no threshold for wage growth, the timing of the first increase in BoE rate will depend on “broad range of data”. According to the BoE, the market expectations point to February 2015 hike, while some big players continue betting for the first move to happen by the year end. “The path of bank rate implied by market, on which this forecast is conditioned, rises by only 15 basis points per quarter and reached only 2.25% by the end of the forecast period” says Carney. The weakness in exports and strong currency impact the rate expectations according to quarterly Inflation Report, while the spare capacity is absorbed faster than expected. The 2Q preliminary GDP reading is due tomorrow. The consensus is stable growth of 0.8% q/q and 3.1% y/y. The crowded data leads to mixed views in the heart of the MPC. Therefore, the hawk-dove balance will gain importance in months ahead.

GBP/USD tests the 200-dma (1.6664) on the downside. The oversold conditions suggest (RSI at 26%, 30-day lower BB at 1.6683) a corrective pause at the current levels. The one-month risk reversals rebound from year low levels, yet remain slightly negative.

JPY extends weakness on machinery data

The soft economic data continues weighing on JPY as additional BoJ stimulus speculations rise. The April-June machinery orders data showed 10.4% contraction on quarter, this is the biggest decline since 2009 Q1. Although expectations for July-September are more optimistic (+2.9% q/q on Reuters poll), the downside risks to Japanese recovery remain a major concern. USD/JPY extended gains to 101.66, offers cap the upside pre-103.00 while a break above this level should signal higher bullish momentum towards April highs (104.13). NZD/JPY sits above its 200-dma (86.622). Technicals suggest further gains towards the daily Ichimoku cloud cover (87.786/88.580) as risk appetite stabilizes.

Today's Key Issues (time in GMT):

2014-08-14T12:30:00 CAD Jun New Housing Price Index YoY, last 1.50%
2014-08-14T12:30:00 CAD Jun New Housing Price Index MoM, exp 0.20%, last 0.10%
2014-08-14T12:30:00 USD Aug 9th Initial Jobless Claims, exp 295K, last 289K
2014-08-14T12:30:00 USD Aug 2nd Continuing Claims, exp 2507K, last 2518K
2014-08-14T12:30:00 USD Jul Import Price Index MoM, exp -0.30%, last 0.10%
2014-08-14T12:30:00 USD Jul Import Price Index YoY, exp 0.80%, last 1.20%

The Risk Today:

EURUSD EUR/USD continues to hold at the lows but rallies have lost any bullish momentum. The proximity of the key support at 1.3296, minor short-term rebounds are likely. Focus remains support at 1.3336 (06/08/2014 low). Bounces should we contained by resistances found at 1.3444 and 1.3503 (05/06/2014 low). 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 has breached the strong support at 1.6693, but has thus far failed push lower to 1.6665 (200 day moving average). However, the technical structure is negative as long as prices remain below the resistance at 1.6700. A break of the resistance at 1.6845 (13/08/2014 high) is needed to suggest exhaustion in short-term selling pressures. 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, see also the 200 day moving average).

USDJPY USD/JPY has breached the resistance at 102.46 (07/08/2014 high, see also the declining trendline). Another resistance can be found at 103.13 (30/07/2014 high). The short-term technical structure is supportive as long as the daily support at 102.35 (200 day moving average) holds. 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 is likely moving in a tight horizontal range between the key support at 0.9040 and the resistance at 0.9117. Monitor the support at 0.9041 (01/08/2014 low), as a break would invalidate the short-term bullish technical structure. Other supports can be found at 0.9008 (24/07/2014 low) and 0.8969 (17/07/2014 low). 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: