Thin Markets ahead of the FOMC

Forex News and Events:

The Sterling seems to be holding up quite nicely for the past two trading days even though UK figures for CPI and unemployment came in worse than expected. CPI was at 2.8% y-o-y, finally printing within the 1%-3% BoE target, and jobless claims change reporting an increase in the number of unemployed by 8.1K instead of a 4.0K decrease. At both events, the GBP dipped to intraday lows before immediately recovering. This reaction might be due to the fact that a lower inflation would allow for further monetary stimulus by the central bank, which members voted against at 7-2 during the last MPC meeting. What’s more, in an agreement with the government, the central bank is launching its monthly Extended Collateral Term Repo (ECTR) for the amount of GBP 5BN to 6 million funds in order to provide a controlled amount of liquidity to the market. In a context where the crisis in Europe is reaching a status quo, Chinese authorities and the Fed seem to be stealing the spotlight as markets turn to them for guidance. During yesterday’s session Chinese Commerce minister Chen Deming said the economy could improve in reaction to growth stimulus by the government. On the US front, the dollar depreciated against its peers as investors expect some form of stimulus from the central bank to help jolt the employment market and protect the economy against further weakening. To this end, the Fed might be considering different approaches. Firstly, one should account for a possible inaction in which the Fed will let the current Operation Twist expire, which would imply a stronger USD against its safe-haven counterparts such as the JPY and the CHF and a downward pressure over high-Beta currencies (AUD, CAD, NZD,…) as markets would fear growth stagnation. Another likely approach is one that doesn’t encompass a balance sheet expansion seen as many FOMC members happen to be positioned against such a tactic. In this scenario the extension of Operation twist would imply a currency neutral balance sheet. The outcome from this scenario is not clear but it is likely that markets expecting further unorthodox intervention will be disappointed, which would trigger strong buying of USD against its major counterparts. In these two cases, one should carefully consider Bernanke’s tone which might be even more dovish than the previous times. In such a case, the central bank would be waiting for a worsening of the European situation before putting in place the adequate tools. A third possibility, however unlikely, is the announcement of a new round of asset purchases or QE3. Such a move is the only one leading investors to unload the USD and will bolster risky currencies against the greenback (CAD, MXN, etc.).

Today's Key Issues (time in GMT):

2012-06-20T00:00:00 AUD AU CB Leading Index
2012-06-20T01:30:00 AUD AU Housing Starts
2012-06-20T06:00:00 EUR GE PPI (yoy)
2012-06-20T06:35:00 JPY JP BoJ Gov Shirakawa Speech
2012-06-20T08:00:00 EUR IT Industrial New Orders
2012-06-20T08:30:00 GBP UK MPC Meeting Minutes
2012-06-20T08:30:00 GBP UK Unemployment Rate
2012-06-20T08:30:00 GBP UK Claimant Count Change
2012-06-20T08:30:00 GBP UK Average Earnings Index
2012-06-20T09:00:00 CHF CH ZEW Expectations
2012-06-20T09:30:00 EUR GE 2-Year Schatz Auction
2012-06-20T14:30:00 USD US Crude Oil Inventories
2012-06-20T16:30:00 USD US FOMC Statement
2012-06-20T16:30:00 USD US Interest Rate Decision
2012-06-20T18:15:00 USD US Fed Chairman Bernanke Speech
2012-06-20T22:45:00 NZD NZ GDP

The Risk Today:

EURUSD EURUSD traded higher yesterday around the US opening, reaching 1.2730 before consolidating at 1.2688. The USD weakened across the board in the wait of an FOMC decision expected to bring in more stimulus to the US economy. The pair continues to trade within the temporary bullish channel but momentum seems to be exhausting, driving EURUSD to trade in the lower half of the channel. We maintain that a break of 1.2672 support resulting from a stimulus announcement by the Fed should trigger broader weakness to 1.2287. First levels of resistance lie at 1.2824 (22nd May high), 1.2906 (support turned resistance), 1.3066 (8th May high), 1.3081 (gap high), 1.3122 (2nd May low), then 1.3179 (7th May pivot high). Should the Fed intervene, a downside move can be expected with first target at 1.2438 (5th June low), 1.2288 (1st June low) 1.2147/52 (29th June 10’ low) then 1.1862 7th June low).

GBPUSD GBPUSD traded higher yesterday during the US session awaiting the FOMC decision after dipping to a three-day low on worse-than-expected inflation data. The pair appears to be consolidating between 1.5645 and 1.5767 for the past few days after the formation of a bullish engulfing pattern during the last two trading sessions. Should the pair gather further bids in the coming session, the next resistance levels can be found at 1.5775 (23rd May high), 1.5852 (22nd May high), 1.5954 (1st Mar pivot high), 1.6066 (support turned resistance), 1.6207 (4th May high), 1.6302 (30th May high), 1.6335 ( 31st Aug 11’ high), 1.6455 (29th Aug 11’ high). Any subsequent dips for the pair will meet support at 1.5645 (30th May high), 1.5602 (Double top on 7th and 12th June), 1.5463 (double touch on 12th June), 1.5405 (8th June low), 1.5374 (6th June low), 1.5321 (5th June low), then 1.5268 (13th Jan low).

USDJPY USDJPY repositioned lower as Japan announced a larger than expected trade balance deficit showcasing stronger imports and exports. The bearish channel witnessed since March is not completely negated by the breakout early June: After USDJPY consolidated within the 79.13-79.79 channel, it is now trading lower and strongly supported by the previous channel’s resistance. Should the break below 78.60 occur, we expect markets to reload long positions to 79.52 for an extended move towards 80.60. Key levels of support can be found at 78.60 (6th June pivot low & downtrend top), 78.00 (Psychological lvl), 77.66 (1st June low), 77.36 (13th Feb low) then 76.58 (3rd & 17th Jan low). If the bearish tone is negated, first levels of resistance remain at 79.52 (15th June pivot high), 79.79 (7th June high), 80.61 (2nd May high), 81.77/86 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40.

USDCHF There is nothing new on the USDCHF front. The trend remains bearish and seen as any Fed stimulus would be USD-negative the pair will be skewed to the downside. As a general notice, traders should be aware of the 1.2000 level as there continues to be heavy speculation regarding the stability of the EURCHF minimum exchange rate. Further dips will find support at 0.9420 (17th June low), 0.9335 (resistance turned support), then 0.9183 (7th & 11th May low). Should the Fed refrain from adding stimulus, the first resistance levels should be at 0.9596 (13th June high), 0.9693 (4th June pivot high), 0.9774 (Feb 2011 high), 1.0067 (1st Dec 11’ pivot high), then 1.0294 (10 Sept 10’ high).

Resistance and Support: