FX traders in wait-and-see mode

Forex News and Events:

Financial markets are now entirely focused on Fed Chairwoman Yellen's speech at the Kansas City Fed's annual Jackson Hole economic symposium. Efforts by the Fed to downplay this event seem to have failed as the only buzz on the wires today is about events in Wyoming. Yellen is scheduled to speak on “Labor Markets” at 6:00cet. The topic could not be timelier as the recent FOMC minutes have a hawkish lean due to labor markets improvements. The minutes exposed that policymakers “generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run.” Clearly the “slack” has begun to narrow. Today the market will look for indicators on what the Fed thinking in regards to the U.S economy and exit strategy. Dovish Yellen has attempted to play down the improvements and retreat from tighter policy. We suspect that she will try and stay neural but will naturally lean towards the corporate line that while improvement in labor and inflation have occurred data still indicates slack. That said with the markets full attention and mostly likely avoidance of discussing the timing of normalization, the language interpretation can always generate short term volatility. Interestingly, in an interview yesterday San Francisco Fed President William stated “Thinking around summer of 2015 for the first rate hike is a reasonable guess given where we think the economy is going and how much progress we are making towards our goals.“
Outside of Jackson Hole, US data fundamentals continued to diverge from Europe. While the deceleration in growth and inflation in Europe is apparent, the US continued to improve. Initial jobless claims, index of leading indicators, Philly fed and existing home sales have all beat expectations. In light of the recent weak EU data, ECB President Draghi’s address at Jackson Hole will also be important. Even should Draghi steer clear of commenting directly on policy strategy today, we remain fundamentally bearish on EUR, as some ECB action will need to be taken? With significant event risk today, traders cut overbought USD longs and seem unwilling to enter any meaningfully positions. However, with rates expected to rise due to steeping policy path we are remains constructive on USD against low yielding G10 like JPY and EUR.

Today's Key Issues (time in GMT):

2014-08-22T12:30:00 CAD Jul CPI NSA MoM, exp -0.10%, last 0.10%
2014-08-22T12:30:00 CAD Jul CPI YoY, exp 2.20%, last 2.40%
2014-08-22T12:30:00 CAD Jul CPI Core MoM, exp 0.10%, last -0.10%
2014-08-22T12:30:00 CAD Jul CPI Core YoY, exp 1.90%, last 1.80%
2014-08-22T12:30:00 CAD Jul CPI SA MoM, last 0.30%
2014-08-22T12:30:00 CAD Jul CPI Core SA MoM, last 0.20%
2014-08-22T12:30:00 CAD Jul Consumer Price Index, exp 125.9, last 125.9
2014-08-22T12:30:00 CAD Jun Retail Sales MoM, exp 0.30%, last 0.70%
2014-08-22T12:30:00 CAD Jun Retail Sales Ex Auto MoM, exp 0.30%, last 0.10%
2014-08-22T18:00:00 USD Yellen speaks at Hackson Hole

The Risk Today:

EURUSD EUR/USD has broken the strong support at 1.3296. The short-term technical structure is negative as long as prices remain below the hourly resistance at 1.3336 (12/08/2014 low). The initial resistance at 1.3297 (intraday high) is challenged. An hourly support now lies at 1.3242 (21/08/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. A downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A key support now stands at 1.3105 (06/09/2013 low), whereas a key resistance lies at 1.3444 (28/07/2014 high).

GBPUSD GBP/USD is in a declining trend as long as prices remain below the resistance at 1.6739. Monitor the support at 1.6556. An initial resistance lies at 1.6679. In the longer term, the break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) invalidates the positive outlook caused by the previous 4-year highs. However, the lack of medium-term bearish reversal pattern and the short-term oversold conditions do not call for an outright bearish view. A key support now stands at 1.6460 (24/03/2014 low).

USDJPY USD/JPY has risen sharply recently and is now close to the key resistance at 104.13. Hourly supports can now be found at 103.60 (21/08/2014 low) and 102.91 (intraday low). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high).

USDCHF USD/CHF has thus far failed to break the strong resistance at 0.9156 (see also the 38.2% retracement). The hourly support at 0.9106 (intraday low) is challenged. Another hourly support can be found at 0.9088 (intraday low), while a key support stands at 0.9024. 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. Monitor the test of the strong resistance at 0.9156 (21/01/2014 high).

Resistance and Support: