UK's modest investment recovery still a concern

Forex News and Events:

The FX markets trade on economic data/news today. The softer-than-expected AUD inflation, the ongoing contraction in China, the lower budget deficit in UK and optimistic BoE minutes, mixed PMI readings out of the Euro-zone are the main talking points. GBP trades softer versus USD & EUR despite good economic news, while AUD continues to be offered across the board. AUD/NZD trends down as the Reserve Bank of New Zealand is expected to hike its OCR for the second consecutive month at April 24th meeting.

UK budget deficit narrows, BoE minutes show optimism

The BoE April MPC minutes showed optimistic voice. UK policy makers stated that the UK recovery is strengthening with growth expected close to 1% in Q1 and Q2 of this year. The BoE said there is only “modest rebalancing toward investment” in line with IMF concerns. All participants voted for unchanged policy rate at the historical low of 0.50%. Softer GBP is clearly in favor of exports and foreign investment moving forward. The risk of wider current account deficit has been mentioned. In addition to hopeful growth forecasts, the UK reduced budget deficit in March, net borrowing fell to 107.7 billion pounds y-o-y (versus 115.1bn pound) as reported by Office of National statistics in London today.

GBP/USD falls to intra-day lows post-data/minutes. Trend and momentum indicators are steadily bullish, yet the reiteration of the weakness in exports/foreign investments weigh on GBP pairs in London today. Option bids with today expiry trail from 1.6775 to 1.6900. As the pair approaches the overbought limits (RSI at 64%), corrective shorts keep the upside limited. Short-term resistance is seen at the 30-day upper BB at 1.6870.

EUR/GBP hit our mid-term target of 0.82042 (March 5th low) yesterday and rebounded from the support zone at 0.81828/0.82000 (30-day lower BB as of yesterday/psychological support). Trend momentum remains negative; we keep our bearish bias as long as resistance at 100-dam (0.82942) holds.

RBA takes a breather on slower-than-expected CPI

The Australian inflation accelerated at the faster pace of 2.9% y-o-y in Q1 (versus 2.7% over the past quarter) yet lower than 3.2% anticipated. The AUD headline inflation thus remains within RBA’s 2-3% target band and pushes RBA hawks on the sidelines. The Aussie trades significantly lower against all of its G10 counterparts post-CPI, the bias turns negative. RBA took a breather, especially after Treasurer Hockey voiced his discontent even with the neutral policy bias.

Last quarter’s pickup in consumer prices had forced RBA to shift bias from dovish to neutral. Governor Stevens had abruptly changed his tone from his previous “85 cents target” (vs. USD) to a softer “AUD is still at historical highs”. Now, we keep in mind that the CPI is at the upper end of RBA’s inflation target band. RBA doesn’t expect the CPI to significantly rise above the band over the next two years (we have doubts). Currently, the slowdown in China and weakening Yuan are likely to keep the upside pressures contained given that China represents more than one thirds of Australian exports.

As suspected, the RBA/RBNZ divergence weighs on AUD/NZD as we walk into RBNZ meeting on April 24th. The Reserve Bank of New Zealand widely expected to hike its OCR from 2.75% to 3.0% for a second consecutive month. AUD/NZD aggressively sold-off to 1.0787 below the 21-dma), a daily close below 1.0770 (100-dma & MACD pivot) should confirm the short-term bearish trend. We expect the antipodean pair back in the broad bearish trend.

Today's Key Issues (time in GMT):

2014-04-23T10:00:00 GBP Apr CBI Trends Total Orders, exp 7, last 6
2014-04-23T10:00:00 GBP Apr CBI Trends Selling Prices, exp 10, last 12
2014-04-23T10:00:00 GBP Apr CBI Business Optimism, exp 25, last 21
2014-04-23T11:00:00 USD Apr 18th MBA Mortgage Applications, last 4.30%
2014-04-23T12:30:00 CAD Feb Retail Sales MoM, exp 0.50%, last 1.30%
2014-04-23T12:30:00 CAD Feb Retail Sales Ex Auto MoM, exp 0.50%, last 1.00%
2014-04-23T13:45:00 USD Apr P Markit US Manufacturing PMI, exp 56, last 55.5
2014-04-23T14:00:00 USD Mar New Home Sales, exp 450K, last 440K
2014-04-23T14:00:00 USD Mar New Home Sales MoM, exp 2.30%, last -3.30%

The Risk Today:

EURUSD bounced yesterday near the support at 1.3780. However, bullish rally is weak. An hourly support is at 1.3780 (22/04/2014 low, see also the low of the declining channel). The next resistance is at 1.3906 (11/04/2014 high). The short-term technical configuration remains positive as long as the support at 1.3730 holds. In the longer term, EUR/USD is still in a dominate uptrend, suggesting additional upside can be anticipated. A significant resistance now lies at 1.3876 (24/03/2014 high).

GBPUSD has breached the fibo level at 1.6823. A solid break above would validated a short-term bullish trend reversal formation. The next resistance can be found at 1.7043 (11/11/2011). The short-term bullish momentum is intact as long as the hourly support at 1.6684 (previous resistance) holds. In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. A major resistance stands at 1.7043 (05/08/2009 high).

USDJPY has breached the resistance at 101.20. As long as the hourly support at 102.37 (old basing pattern) holds, a further short-term rise is favoured. Hourly resistances are at 102.83 (21/04/2014 high) then a distant 104.13 (04/04/2014 high). A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.80) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013) holds. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF continues to be weak following its break of 0.8805 resistance. However, as long as the support at 0.8820 (21/04/2014 low) holds, a move towards the resistance at 0.8930 (04/04/2014 high) is still favored. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures and a potential base formation. A decisive break of the key resistance at 0.8930 would open the way for further medium-term strength.

Resistance and Support: