Forex - Sterling Benefits From ILO Unemployment Data, Market Awaits BoE Report

Forex News and Events:

Risk appetite remains the persistent driver of FX markets, with a deluge of encouraging Chinese data released overnight continuing to stoke sentiment into the middle of the week. Trade balance figures highlighted that the surplus grew yet again in October, a fact which will likely bring calls for Yuan appreciation back to the fore. Against this backdrop, Retail Sales were shown to have grown an impressive 16.2% YoY against estimates of 15.7% (15.5% prior), and Industrial Production yet again trumped expectations, growing 16.1% YoY compared to forecasts for a 15.5% gain. As the economy largely credited with driving the global recovery from recession, China’s consistent growth will encourage markets that the return to trend is well underway, and this has played out accordingly in FX markets this morning with widespread USD-selling in favour of higher yielding risk-assets. Most currency pairs have been range-bound in the early part of the week with very little economic data to spur prices through key technical levels. However with this morning’s bout of USD weakness pushing currencies to within touching distance of breaking through last USD supports, and the US holiday likely to produce unpredictable patches of thin liquidity, we could see a breakout materialize from a seemingly innocuous triggers. This morning we have seen the release of the UK’s ILO Unemployment figures which showed a surprise 7.8% reading against forecasts for 8.0%. Last month’s levels were also revised lower from 7.9% to 7.8%, causing the GBP to rally to highs of 1.6779 ahead of the BoE’s Quarterly Inflation Report. Although the impending release of the Inflation Report has subdued GBPUSD’s rally compared to other majors this morning, we feel the risks are biased towards further GBP upside when the details are published. Bear in mind that the BoE already had this report at their disposal at the recent rate meeting on November 5th, and the MPC stated then that inflation could rise sharply in the short term as a consequence of GBP weakness. In addition, any potential indicators that the UK economy is likely to need no further QE injections will also be a catalyst for GBP to rally, but we remain cautious that of the world’s major economies, Japan and the UK remain the two that seem most susceptible to a double-dip scenario.

Today's Key Issues (time in GMT):

10:30 GBP BoE publishes quarterly Inflation Report Q4

The Risk Today:

EurUsd We mentioned yesterday that 1.5046 would provide resistance and after hitting 1.5044 three times in the last hour it will be an interesting scenario to play with. A break higher targets 1.5184 but bearing in mind that this is the first visit to the 52 week highs, it is incredibly likely to attract intraday shorting back down to 1.5020 at the very least. Consolidation will be the name of the game for the medium term; bulls looking to take the pair higher, as they work off the RSI divergence and the several other indicators pointing towards a short term overbought condition before mounting any further attacks on the upside.

GbpUsd We spoke yesterday of waiting for fresh short signals and hey presto, the daily chart yesterday printed a ‘hanging man’ candle which are topping candles. The last time we saw one we had a 4 figure drop in one day. It is interesting to note that this formation is occuring right on the 2 year downtrend line and is accompanied by some notable RSI divergence, so while it may well be prudent to wait for some confirmation before getting short given the recent action in risk assets over the last few days, I most definitely would not be long no matter how many others are telling me to do so. If I miss it, I miss it, but any reward here on the long side is just not worth the risk in my opinion.

UsdJpy Yesterday we discussed the rangebound action between 89.71 and 90.20 with shorts expected at the higher end looking to pile more pressure on the downside. The shorts came in a little early at 90.17 and after several hours managed to break the support pushing the pair to the next support level at 89.39. This now puts the trend as down on every time frame but remember the major support below at 89.17 and refrain from leaving your hand in the cookie jar.

UsdChf The resistance at 1.0132 didn’t even get tested yesterday as the pair attracted new shorts slightly lower at 1.0110. Just like every other USD pair we saw minor support for a few hours yesterday afternoon before hitting prior lows this morning, in this case at 1.00378 as previously targeted. This is an extremely important level for the USD bulls to hold and if we don’t see some USD short squeezing this afternoon then we have to prepare ourselves for sub parity. For now though, 1.0037 looks good for the intraday longs with tight risk management.

Resistance and Support: