Summit Resolutions Lack Substance

Forex News and Events:

Last week’s EU summit yielded three keystones to helping resolve the European crisis. Firstly, European leaders agreed to wave governments’ seniority over Spanish and Italian debt, granting private creditors more security over the repayment of their debt. Secondly, the EFSF –soon to become ESM- should be allowed to buy sovereign debt on the secondary markets to help ease climbing yields for struggling EU members. Thirdly, the ESM would contribute directly to the recapitalization of ailing banks. These resolutions would lift current market conditions greatly should they be immediately applicable. Markets jumped across the board on Friday, scoring the largest advance since the start of 2012 for most. 

European stock markets advanced with the DAX adding 1.90% to its value and the CAC 40 1.67%. US equity followed with the S&P 500 leaping 2.49% higher, the DJIA 2.20%. Investors also sought to buy commodities, as gold strengthened by 3.34% intraday and its sister commodity silver jumped as much as 5.70%. Nevertheless, the situation could not be sustained as most markets opened lower overnight and seem to slowly be reversing down. The reaction comes from the fact that however optimistic the framework is, the leaders still have to discuss at length the details for the implementation. The communiqué from the summit notes that EU members are committed to using the stability funds “in a flexible and efficient manner in order to stabilize markets”. But this is not a new action plan as it is exactly the same pledge that was made at the creation of the ESM. On the other hand, key limitations were set during the summit, which will make it hard for Spain and Italy to benefit from ESM’s bond market assistance. The fund will only have access to EUR 355BN on July 9th unless the process of capital contribution is accelerated and EUR 500BN would be made available. Whether it’s the first or second scenario, the Italian and Spanish bond markets appear to be much larger than the agreed upon contributions. The second limitation would be that the secondary debt that would be bought by the ESM on the secondary markets to help ease yields will not be funded, and so the fund will have to issue debt of its own which, due to the current stress over the bond markets, might be hard to achieve successfully. The third restraint and the most lengthy of all would be the fact that any demand for a loan from the ESM will need to be supported by a Memorandum of Understanding that would need heavy negotiations and is subject to paralysis by political interventions. So we are left waiting until July 9th as the ESM will be launched and Spain will be able to access its credit.

Today's Key Issues (time in GMT):

2012-07-02T02:30:00 AUD Chinese HSBC Manufacturing PMI
2012-07-02T06:30:00 EUR AU Commodity Prices
2012-07-02T07:13:00 CHF SP Manufacturing PMI
2012-07-02T07:15:00 CHF CH Retail Sales (YoY)
2012-07-02T07:30:00 EUR CH SVME PMI
2012-07-02T07:50:00 EUR FR Manufacturing PMI
2012-07-02T07:55:00 EUR GE Manufacturing PMI
2012-07-02T08:00:00 EUR IT Unemployment Rate (MoM)
2012-07-02T08:00:00 GBP EU Manufacturing PMI
2012-07-02T08:30:00 EUR UK Manufacturing PMI
2012-07-02T09:00:00 USD EU Unemployment Rate
2012-07-02T14:00:00 JPY US ISM Manufacturing Index
2012-07-02T23:50:00 JP Monetary Base (YoY)

The Risk Today:

EURUSD opened around Friday’s high, but failed to maintain the rally caused by the summit’s resolutions, closing the weekend gap and returning to trade between the upper side of the downward channel started in April at 1.2624 and the 1.2685 resistance. We suspect EURUSD will remain above 1.2566, its 18-DMA but do not expect the pair to recover for the day. If the pair manages to break its 18-DMA at 1.2566, the main support levels would be located at 1.2439 (Multiple support and resistance in June), 1.2287 (1st June low) 1.2147/52 (29th June 10’ low) then 1.1862 (7th June low). However, if the bearish harami formation fails to confirm, EURUSD will find the first bids at 1.2685 (June 19th high & June 20th low), 1.2754 (June 20th high), 1.2826 (22nd May high), and a move extension towards 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).

GBPUSD  opened lower overnight after solidly breaking through two levels of resistance on Friday (1.5566, 1.5663) and stopping its advance at the third level around 1.5714. The pair is now forming a bearish harami pattern but we do not expect a strong reversal signal and suspect GBPUSD will trade between 1.5663 and 1.5714 for the day. The next levels of support remain unchanged at 1.5663 (18th June & 19th June bottom), 1.5566(Multiple June bottoms), 1.5488 (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). However, if the pair manages to resume its hike, the next bids will be located at 1.5785 (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).

USDJPY  failed to close outside the ascending triangle on Friday. The 200-HMA continues to converge strongly towards the support band, which suggests USDJPY will probably be unable to stay within the downward channel depicted on Friday which was in formation since June 25th. Should the pair close below the 79.34 support, the next levels are located around 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). However, if the pair moves back up within the triangle, the first bids can be found at 79.95 ( 22nd May & 23rd May highs),80.21 (reversal), 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40.

USDCHF  seems to be recovering today from Friday’s dip. The pair had closed below the support trend started April 30th at 0.9484 and opened lower overnight before reversing its course to trade just below the support at 0.9504. We suspect the pair is still bound to move along this support line with an upward bias unless it manages to close for a second consecutive session below the line. The first levels of resistance are at 0.9584 (13th June high), 0.9683 (4th June pivot high), 0.9774 (Feb 2011 high), 1.0067 (1st Dec 11’ pivot high), then 1.0294 (10 Sept 10’ high). Should the trend be broken, the next support levels will be at 0.9419 (17th June low), 0.9369 (21st May Support), then 0.9183 (7th & 11th May low).

Resistance and Support: