More downside expected for EURUSD

Forex News and Events:

Market shifted back into risk aversion pattern as Asian regional indices fell and USD, Gold gained and VIX rose slightly. US 10year treasury yields eased towards 2.3%. The catalyst was reports (supported by Nato satellite images) that indicate Russian troops have crossed the border into Ukraine sovereign territory. US hawks got more good news yesterday as second release for US 2Q GDP yesterday saw an upward revision to 4.2% from 4.0%. Combined with the incoming data H2 economic recovery looks to be strong and weak Q1 read seems to be nothing more than weather driven distortion. With upside surprises in confidence surveys and housing markets accelerations, even stalled wage growth, looks less likely to pull-down the US's economic escape velocity. The market improvement and corresponding Fed policy path seems to be a significant diverganrt from Europe's worrying signals. Eurozone this week produced a string of worrying economic data including services, industrial and economic confidence surveys. In addition, escalations in tensions between Russia and Ukraine will only further damage growth in Europe. There is a high probably that sanctions war wtih Russia will push Europe into a recession. With further debated on fiscal austerity heating up, against after Draghi seemingly provided a reprive toward harsh spending cuts in Jackson Hole, there is only one instiution in Europe that can provide assistance. Today’s soft inflation read should further entrench market expectations that some form of easing measures will be announced by the ECB. We expect that the ECB will choose to wait till they can gauge the real effect of June unorthodox measures in negative interest rates and launch of new LTRO. We currently expected ECB action in early 2015 although a sudden negative shift in EU data could pull forecast into late 2014. Given the expectations of the ECB to launch new measure we remain significantly bearish on the EUR.

US GDP data remains strong

In the US today, we should see personal income rise to 0.3%, but consumer spending should print a moderately weak 0.2%. Core PCE is expected to increase 0.1% m/m, 1.5% y/y, while Michigan Confidence is expected to rise from 80 to 80.5. With more solid economic data from the US and following Fed Chair Yellen’s Jackson Hole less dovish speech we remain USD bullish. In addition with geopolitical risk rising from Ukraine and the US looking forward to a long holiday weekend, traders will rmeian defense. We would see any EURUSD rally as an opportunity to reload short.

Weak data points to BoJ easing

Overnight, weak data in Japan further suggests to us that the BoJ will have to move forward to support the fading economic recovery. Japan’s industrial production increased 0.2% m/m in July, below 1.0% expectations. This weak read follows a prior fall of 3.4%. Total household spending decelerated -5.9% y/y on the month is following a -3.0% y/y drop in June (illustrating the VAT build up effect). Retail sales fell -0.5% in July, softer than the 0.3% m/m gain expected. Concerning still is the fall in vehicle production by -1.7% from 6.6% potentially indicating a further slowdown in exports. Japan’s inflation lessened to 3.4% y/y in July from 3.6% in June, in line with consensus. Core inflation ex-food remained unchanged at 3.3%. We are unsure of the exact nature and timing of the next BoJ action yet we are confident they will move forward. Given this expectations we remain significantly bearish on JPY and positive on Japanese equities (despite stretch valuations).

Today's Key Issues (time in GMT):

2014-08-29T06:00:00 GBP Aug Nationwide House PX MoM, exp 0.10%, last 0.10%, rev 0.20%
2014-08-29T06:00:00 GBP Aug Nationwide House Px NSA YoY, exp 10.20%, last 10.60%
2014-08-29T07:00:00 DKK 2Q P GDP QoQ, exp 0.30%, last 0.80%, rev 0.60%
2014-08-29T07:00:00 DKK 2Q P GDP YoY, exp 1.00%, last 1.30%, rev 1.20%
2014-08-29T07:00:00 CHF Aug KOF Leading Indicator, exp 97.8, last 98.1, rev 97.9
2014-08-29T07:30:00 SEK Jun Wages Non-Manual Workers YoY, last 2.10%
2014-08-29T08:00:00 NOK Aug Unemployment Rate, exp 2.90%, last 3.00%
2014-08-29T08:00:00 NOK Jul Retail Sales W/Auto Fuel MoM, exp -0.30%, last 1.20%
2014-08-29T08:00:00 NOK Sep Norges Bank Daily FX Purchases, exp 0M, last 0M
2014-08-29T09:00:00 EUR Jul Unemployment Rate, exp 11.50%, last 11.50%
2014-08-29T09:00:00 EUR Aug CPI Estimate YoY, exp 0.30%, last 0.40%
2014-08-29T09:00:00 EUR Aug A CPI Core YoY, exp 0.80%, last 0.80%
2014-08-29T12:00:00 NOK Norges Bank Releases 3Q Expectations Survey
2014-08-29T12:30:00 CAD 2Q Quarterly GDP Annualized, exp 2.70%, last 1.20%
2014-08-29T12:30:00 CAD Jun GDP MoM, exp 0.20%, last 0.40%
2014-08-29T12:30:00 CAD Jun GDP YoY, exp 3.00%, last 2.30%
2014-08-29T12:30:00 CAD Jul Industrial Product Price MoM, exp -0.20%, last -0.10%
2014-08-29T12:30:00 CAD Jul Raw Materials Price Index MoM, exp -1.80%, last 1.10%
2014-08-29T12:30:00 USD Jul Personal Income, exp 0.30%, last 0.40%
2014-08-29T12:30:00 USD Jul Personal Spending, exp 0.20%, last 0.40%
2014-08-29T12:30:00 USD Jul PCE Deflator MoM, exp 0.10%, last 0.20%
2014-08-29T12:30:00 USD Jul PCE Deflator YoY, exp 1.60%, last 1.60%
2014-08-29T12:30:00 USD Jul PCE Core MoM, exp 0.10%, last 0.10%
2014-08-29T12:30:00 USD Jul PCE Core YoY, exp 1.50%, last 1.50%
2014-08-29T13:00:00 USD Aug ISM Milwaukee, exp 60, last 63.87
2014-08-29T13:00:00 CAD CMHC to Release its 2014 Second Quarter Financial Report
2014-08-29T13:45:00 USD Aug Chicago Purchasing Manager, exp 56.5, last 52.6
2014-08-29T13:55:00 USD Aug F Univ. of Michigan Confidence, exp 80, last 79.2

The Risk Today:

EURUSD EUR/USD remains weak as can be seen by the failure to break the hourly resistance at 1.3220 (25/08/2014 high). Furthermore, the technical structure is negative as long as prices remain below the hourly resistance at 1.3297 (22/08/2014 high). An hourly support lies at 1.3153, while a key support stands at 1.3105 (06/09/2013 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. A long-term decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) is favoured. However, in the shorter term, monitor the key support at 1.3105 (06/09/2013 low) given the general oversold conditions. A key resistance lies at 1.3444 (28/07/2014 high).

GBPUSD GBP/USD is trying to bounce after its bullish intraday reversal made on 25 August. However, a decisive break of the hourly resistance at 1.6601 (21/08/2014 high) is needed to suggest weakening selling pressures. Other hourly resistances can be found at 1.6679 and 1.6739. Hourly supports stand at 1.6537 and 1.6501 (25/08/2014 low). 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 stands at 1.6460 (24/03/2014 low).

USDJPY USD/JPY is correcting after failing to hold above its key resistance at 104.13. A break of the hourly support at 103.50 (22/08/2014 low) would confirm a deterioration of the short-term technical structure. Another support lies at 102.91 (intraday low). Hourly resistances can be found at 104.17 (26/08/2014 high) and 104.49 (25/08/2014 high). 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 broken the hourly support at 0.9138 (26/08/2014 low). However, yesterday's large daily lower shadow indicates persistent buying interest. Another support stands at 0.9104 (22/08/2014 low). An hourly resistance now lies at 0.9185 (27/08/2014 high). 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. A key resistance stands at 0.9250 (07/11/2013 high).

Resistance and Support: