Euro-Zone GDP Shrinks in Q4

Forex News and Events:

The trading news was rather positive out of the US stock markets yesterday. The Dow Jones Industrial index hit its historical high, while the S&P500 was not far behind. The ISM non-manufacturing data surprised to the upside ahead of the NFP numbers scheduled on Friday.

The currency markets showed limited enthusiasm overnight, as the focus shifts to BoJ, ECB and BoE policy announcements scheduled for the end of the week. JPY, EUR and GBP traded in tight ranges, while AUD remained bid overnight. The morning saw the Euro-Zone GDP numbers shrink, sending the EUR down from its early picks.

Expect No Changes from BoJ

The two-day BoJ meeting will lend its policy decision tomorrow. The exiting Governor Shirakawa will probably keep the policy rate unchanged at 0.10% at his last meeting. JPY and its crosses traded in tight range overnight. USDJPY remained well supported over 93.00, while stops are seen between 93.50/94.00. Technically, the currency pair stepped over its 21-day MA this morning, as the short term trend momentum remained weak.

ECB May Surprise

Over the past weeks, the situation in the Euro-Zone has not been very supportive to improve the economy’s outlook in the future. The Italians voted for anti-austerity, the LTRO repayments remained too short of market expectations, the situation in Ireland and Portugal remained uncertain, while Spain asked for more flexibility on the future deficit target. The Euro-Zone is in deep political and economic crisis, and we do not see any signs of improvement regarding the future yet. The GDP growth shrank by 0.6% in the fourth quarter in line with market expectations. EURUSD fell to 1.3030 in reaction, not a significant move.

In the middle of this chaos, the markets are now looking for ECB to do something about the shrinking Euro-Zone. However, the expectations seem too-dovish compared to what Draghi might deliver at his speech tomorrow. Although we expect the ECB to intervene sooner than later, we do not bet on an interest rate cut tomorrow. In our view, the potential “not-enough-dovish” statement should be rather EUR-positive for the end of the week.

Technically, 1.3074/80 (Fibonacci 61.8% level) acted as decent resistance since yesterday. Although we keep our bearish-EUR view on the long-run (believing that the fundamentals should impact the currency at some point), the high speculative EUR-trading might deviate from its current bearish trend by the end of the week.

BoE Should Sound Dovish

The UK went through heavy squeezes recently due to an explosive combination of its credit rating downgrade, weak economic data, and heavy currency sell-off. BoE already mentioned a potential interest rate cut to boost the growth to 3% in the three coming years. Naturally, the expectations are highly dovish.

GBPUSD slid below 1.51 this morning and we see more room to the downside. MACD 50-100 day indicates a strengthening of the bearish trend. We place our next support at 1.50 psychological-level, and believe that the end of the week should see a new wave of GBP unwind. 

Today's Key Issues (time in GMT):

2013-03-06T12:00:00 USD MBA Mortgage Applications, last -3.8%
2013-03-06T13:15:00 USD Feb ADP Employmenet Change, exp. 170K, last 192K
2013-03-06T15:00:00 CAD Bank of Canada Rate Announcement, exp. 1.00%, last 1.00%
2013-03-06T15:00:00 USD Jan Factory Orders, exp. -2.2%, last 1.8%

The Risk Today:

EURUSD Technicals really have not changed much since yesterday with EURUSD in a choppy sideway range. Monday has rebounded off 1.2966 lows but has failed to generate enough demand to break into daily cloud cover. Momentum and trend indicators are solidly bearish and indicate further downside. A daily close below 1.2966 support would be a bearish signal (opportunity to reload on shorts) and indicate an extension of weakness to 1.2878. The next support is located at 1.2966 (1st Mar low), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high). The first level of resistance remains at 1.3090 (daily cloud cover), 1.3162 (28th Feb high), 1.3250 (65d MA), 1.3460 (14th Feb high), 1.3578 (7th Feb high), 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high).

GBPUSD GBPUSD has recovered to 1.5196 but demand quickly faded pushing the pair down to 1.5108. Interestingly, the multiple long tails clearly hints of indecisiveness. In the mid-term, we remain bearish as indictors are negative and believe bearish trending condition will persist. Unlike the Fed, expectation for the BoE is more QE (making this weeks BoE MPC meeting critical) which should equal further erosion in GBP. The support levels from here are thin below with 1.4950 (8th July 10’ low), 1.4687 (9th July 2010 low), 1.4500 (9th Jun 2010 base) Watch for next resistance to come into play at 1.5056 (25th Feb low), 1.5527 (22nd Feb high), 1.5689 (13th Feb high), 1.5850 (8th Feb high), 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 USDJPY has slipped lower (93.21 low) into a sideways range pattern ahead of tomorrow’s BoJ policy announcement. We remain bullish despite Mondays formation of a Bearish Harami on the daily charts and resulting correction lower. Resistance at 94.77 (Feb high) will prove the next real challenge to the current bullish trend. On the downside, support is eyed at 93.18 (21d MA), 90.93 (25th Feb low), 89.35 (11th Jan high), 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). Above us, minor resistance remains 94.77 (Feb high), 94.98 (6th May high) 95.00 (psychological level), 96.00 (11th June), then 97.75 (7th Aug high).

USDCHF USDCHF is consolidating above near term support. With trend and momentum indicators significantly bullish and the violation of 200d MA, we expect to see our extension target at 0.9457 challenged in the near term. The next levels of resistance are located 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). The first levels of support remains at 0.9200 (21d MA), 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low).

Resistance and Support: