Hollande Says "The Euro Value Doesn't Correspond to Real Economy"

Forex News and Events:

The risk appetite deteriorated overnight, as the concerns over the European stability revived. The corruption allegations against the Spanish PM Rajoy added to the uncertainty over the Italian elections right ahead. The European stocks slid to 2013-lows, the spread between the core and peripheral yields rose, and the EUR extended losses against all of its major counterparts during the Asian session. While the German PM Merkel gave support to Rajoy’s efforts, the European Council highlighted the emergency for Spain to implement the restructuring of the state-aided banks and complete reforms. Even if the bad news pulled the EUR down, the single currency managed to consolidate losses since the European opening.

EUR Recovers Losses

The markets needed IMF to say out loud the obvious concerns on the European instability to trigger a downside correction of the recent EUR rally. Yet, the effect of EUR-negative news remained limited, as the fears on the EZ are already priced-in. The spread between the core and peripheral bonds narrowed as of this morning, and the single currency managed to partly recover yesterday’s losses, as PMI releases wiped out the debt concerns at a very surprising pace.

The Euro-Zone Services and Composite PMIs came in slightly better than expected, while the discrepancies among the European countries remained high. The January PMI Services fell to 43.9 in Italy, remained unchanged at 43.6 in France, and improved to 55.7 in Germany. The Spanish economy saw its services PMI contraction narrow to 47 (from 44.2) in January, yet the unemployment rose to 26.02%. The economic instability, the growing divergences between the core and periphery and the upcoming political uncertainties regarding the Italian and German elections build an explosive cocktail for the euro-area and the single currency. As the bullish theme still holds tight for EUR, the French President Hollande is concerned about Europe leaving its currency too vulnerable to variations in both sides. Hollande thinks that the EUR value does not match the reality without a reasonable FX policy. Should Euro join the currency war?

Don’t Expect Carney to Save the GBP (either at his testimony or BoE MPC decision)

In UK, the PMI Services showed expansion in January, while the official change reserves increased to USD565M from USD-350M in December reading. The new BoE Governor Carney’s early strategy of GDP targeting seems to have failed to grab the market attention, and now he is heading towards a more effective communication to support policy. This can cause short term volatility in sterling, while our mid-term view on the sterling is bearish.

Bye Bye Shirakawa

In Japan, the BoJ Governor Shirakawa finally announced that he will step down, leaving the field in dovish PM Abe’s hands. Naturally, USDJPY immediately jumped to 92.90 / 93.00 zone and we believe that the way to 95.00 levels is now wide-open for JPY. With a light calendar in the US, the news out of Japan should trigger a “risk-on” theme in the region, and help AUD to recover its 65 pips drop from RBA’s outlook for a further policy easing, even though the policy rate was kept unchanged at 3%.

Today's Key Issues (time in GMT):

2013-02-05T07:00:00 CHF Dec trade balance; actual CHF 1.00bn, last CHF2.946 bln surplus.
2013-02-05T08:15:00 EUR ESP Jan PMI - services index, actual 47.0, 44.1 eyed; last 44.3.
2013-02-05T08:45:00 EUR ITA Jan PMI - services index, actual 43.9, 45.8 eyed; last 45.6.
2013-02-05T08:50:00 EUR FRA Jan PMI - services index, actual 43.6, 43.6 eyed; flash 43.6.
2013-02-05T08:55:00 EUR GER Jan PMI - services index,actual 55.7, 55.3 eyed; flash 55.3.
2013-02-05T09:00:00 EUR Jan PMI - services index, actual 48.6, 48.3 eyed; flash 48.3.
2013-02-05T09:00:00 EUR Jan PMI - composite index, actual 48.6, 48.2 eyed; flash 48.2.
2013-02-05T09:30:00 GBP Jan PMI - services index, actual 51.5, 49.5 eyed; last 48.9.
2013-02-05T10:00:00 EUR ITA Jan CPI m/m,actual 0.2%, +0.2% eyed; last +0.2%
2013-02-05T10:00:00 EUR ITA Jan CPI,y/y actual 2.2%, +2.2% eyed; last +2.3%.
2013-02-05T10:00:00 EUR ITA Jan HICP m/m , actual -2%, -1.9% eyed, last 0.3%
2013-02-05T10:00:00 EUR ITA Jan HICP y/y , actual 2.4%, 2.6% eyed, last 2.6%
2013-02-05T10:00:00 EUR Dec Retail Sales m/m, actual -0.8%, -0.5% eyed; last +0.1%
2013-02-05T10:00:00 EUR Dec Retail Sales y/y, actual -3.4%, -1.4% eyed; last -2.6%
2013-02-05T15:00:00 USD Jan ISM non-mfg index, 55.2 eyed, IFR 55.3; last 56.1

The Risk Today:

EURUSD We failed to anticipate the aggressiveness of yesterday’s EURUSD sell-off to a 1.3451 low. We had expected a slight correction on profit-taking but what we witnessed was the bears stepping back into the market (damaging 1.3491 support). However with other bullish technical indicators such as trend in MACD, while the pullback has allowed a health unwind of RSI overbought conditions, we would look to reload long positions. The first level of resistance remains at 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high). The next support is located at 1.3456 (4th Feb low), 1.3256 (Dec range floor), 1.3123 (65d MA & Uptrend channel), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high), 1.2787 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high).

GBPUSD GBPUSD has sharply reversed course with the deep sell -off hitting 1.5690 low but since them the recovery rally has failed to gain momentum. If the loss of downside momentum leads to a recovery rally higher, we still feel that the best scenario the bulls can hope for is a period of sideways range trading (spanning roughly 1.5673 – 1.5891 ). While the pair remains range bound, the bearish trend and momentum indicators suggest further downside should be anticipated. Key support is located at 1.5673. The support zone is located at 1.5673 (28th Jan low), 1.5574 (9th Aug high), 1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). Watch for next resistance to come into play at 1.5891 (200d MA & 21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).

USDJPY Not much change to the USDJPY outlook today, as the pair remains range bound., We saw a decent rally off the 92.00 handle overnight, but since then we have drifted between 92.10 and 92.50 without incident. In the near-term, despite one-directional rise, we think fundamentals have set the course and expected an extension target of 94.49. Above us, minor resistance remains at 92.49 (4th Feb high) then 94.19 (Fibo lvl Jun 2007 high to Oct 2011 low) . On the downside, support is eyed at 89.35 (11th Jan high), 88.88 (21d MA), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high).

USDCHF USDCHF bears had charged in pushing the pair down to 0.9022 but since then the supply has dried up. We should expected further consolidation range trading between 0.9020 to 0.9120. That said the deep pullback has been supported by momentum and trend indictors (back in downtrend) and suggests further downside should be expected. The violation of 0.9085 (in the absent of a recovery rally through 0.9180) should trigger extended weakness to 0.8929. The first levels of support remains at 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low). The next levels of resistance are located 0.9214 (29th Jan high), 0.9304 (100d MA), 0.9385 (18th Jan high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance).

Resistance and Support: