USD retraces gains, Fed minutes in focus

Market Brief

The US earnings season started with Alcoa posting better-than-expected result in the second quarter. USD will remain under pressure today with Fed minutes due at 18:00 GMT; we do not expect any surprises. Fed’s Lacker and Kocherlakota sounded cautious in their comments yesterday; the dovish tone is however broadly priced in. USD retraces post-NFP gains walking towards Fed minutes.

NZD/USD tests fresh highs this week, European traders brought the pair to 0.8818 as soon as they stepped in. The pair trades in the mid-range of its uptrend channel building since mid-June. Comments from RBNZ’s McDermott confirmed the hawkish policy outlook; a daily close above 0.8770 should keep the bias on the upside. The key resistance stands at 0.8843 (August 2011 high). AUD/NZD extends weakness to 1.0660 (July support), a breakout below this level will shift the focus to 1.0649 (May low), 1.0540 (March support), then 1.0493 (2014 low, lower levels since end-2005).

USD/CNY dropped aggressively to three month lows (6.1933) as US-China talks started in Beijing on numerous issues from cybersecurity to Asian maritime disputes. The Chinese consumer price inflation accelerated at the slower pace of 2.3% in June (vs. 2.4% exp. & 2.5% last), the producer prices contracted by -1.1% (vs. -1.0% exp. & -1.4% last) pulling the factory-gate prices at lowest levels in more than 2 years. The Chinese inflation remains way below PBOC’s 3.5% official target, thus giving flexibility for more monetary stimulus. We expect resistance to Yuan strength at 6.1803 (Fibo 61.8% on Jan-April rally).

USD/JPY and JPY crosses were better bid after a difficult New York session. USD/JPY retreated to 101.45 in Tokyo as USD continued retracing last week’s post-NFP gains. Trend and momentum indicators remain flat, resistance is eyed at 101.84/102.02 (200-dma / daily Ichimoku cloud base), then 102.47 (cloud top). All depends on global USD appetite pre-Fed minutes. EUR/JPY is still hovering around its 21-dma. The 50-dma (139.25) crossed 200-dma (139.30) on the downside, technically favoring the short-side of the play.

EUR/USD extends gains to 1.3631 on broad-based USD weakness. The pair has broken its 200-dma post-NFP/Draghi on Thursday July 3rd; the key resistance is naturally at this level. The MACD (12, 26) is still marginally positive and ready to favor the upside if 1.3572/76 (MACD pivot / July 7th low) support holds. The ECB President Draghi will speak in London today (18:30 GMT), we do not expect any surprises out of this lecture.

The Cable recovers losses on heavy disappointment due to May production data released in London yesterday. GBP/USD steadily paired losses to hit 1.7147 in London open. Technically, GBP/USD tests June-July uptrend base, with trend and momentum indicators still favoring the upside. The critical resistances are placed at 1.7180 (year high), 1.7259 (30-day upper BB), then 1.7332 (50% retracement on 2008 decline). On the downside, bids should come into play at 1.7000/41 (optionality/21-dma). The two-day BoE meeting starts today, the verdict is due tomorrow. We expect no changes from the BoE meeting.

All eyes are on the Fed minutes from June 17-18th meeting. No surprises are expected. The economic calendar of the day: Swedish June Unemployment, HUK Halifax June House Prices m/m & 3m/y, Spanish May House Transactions, US July 4th MBA Mortgage Applications, Canadian June Housing Starts.