A dovish ECB monthly report

Forex News and Events:

The ECB published today its monthly report with a very dovish tone saying it cautioned that the euro zone is expected to « recover only very gradually with momentum being further dampened by a number of factors ». The central bank’s report enumerated several factors such as severe stress in peripheral sovereign debt markets, the impact on the financing capacity of the ailing EU members, high unemployment and balance sheet readjustments. In line with Draghi’s announcement last Thursday, the report also declared the ECB may intervene in bond markets with the collaboration of the bailout fund.
The report also commented over the general situation in Europe, saying the risks “continue to be on the downside”, and that they relate to the tensions in financial markets of several members as well as potential increases in energy prices over the medium term. As for inflation, the ECB expects it to continue to be concordant with the Governing council’s target (close to but below 2%). The bank has cut its growth forecast for the EU to a 0.3% contraction against a previous estimate of -0.2%. UK’s trade numbers came out earlier this morning during the European trading session. The June deficit widened a record to EUR 4.308BN up from a prior GBP 2.718BN. The widening of the deficit was mainly due to a sharp drop in goods exports of 7.4 percent, mainly in reason of weaker trading relations with Germany and continental Europe. After the trade figures, the GBP remained stronger against the EUR, as the pair is currently trading at 0.7882, the 18-day EMA. The next level to the downside will be located at the flattening 20-Day Bollinger Moving average at 0.7853. However unlikely, should EUR bulls manage to gather momentum, we believe the pair will find solid resistance at the converging 55-day EMA and 20-day UBB. Today we expect the US trade balance deficit to have shrank to USD 47.5BN down from 48.7BN, probably due to a lower energy bill. Canadian Trade balance deficit however will probably have widened for the same reasons, reaching CAD 1BN down from CAD -0.8BN. The data is to be released at 12:30 GMT. 

Today's Key Issues (time in GMT):

2012-08-09T01:30:00 AUD CN CPI (YoY)
2012-08-09T01:30:00 JPY AU Unemployment Rate
2012-08-09T04:00:00 JP Interest Rate Decision
2012-08-09T05:30:00 CN Retail Sales
2012-08-09T05:30:00 CN Industrial Production (YoY)
2012-08-09T05:30:00 JPY CN Fixed Asset Investment
2012-08-09T07:15:00 EUR JP BoJ Press Conference
2012-08-09T08:00:00 GBP EU ECB Monthly Report
2012-08-09T08:30:00 CAD UK Trade Balance
2012-08-09T12:15:00 USD CA Housing Starts
2012-08-09T12:30:00 CAD US Initial Jobless Claims
2012-08-09T12:30:00 USD CA Trade Balance
2012-08-09T12:30:00 US Trade Balance

The Risk Today:

EURUSD Technical's have not change radically other than a slight bearishness creeping in, but well within its 4 day range. Today the pair has retracing back to 1.2362 levels in thin trading. While momentum indicators are still pointing higher , the bulls have yet to gather the bid necessary to stage a sustained recovery rally (opening up run to extension target at 1.2598). This week is notably light on economic data suggesting we will see further consolidation of last week’s gain rather than a directional breakout. The first levels of resistance lie at 1.2446 (7th Aug high), 1.2592 (fibo retracement from Feb/July), 1.2685 (June 19th high & June 20th low), 1.2754 (June 20th high), 1.2826 (22nd May high), 1.2906 (support turned resistance), 1.3066 (8th May high). While it is possible that sideways range trading may persist for a while, we still believe that eventually the next major move will be bearish. Next levels of supply located at 1.2327 (multi-July tops), 1.2160 (13th July low), 1.2046 (25th July low), 1.2000 (psychological support) then 1.1870 (7th June low).

GBPUSD GBPUSD hit a low of 1.5572 yesterday, but rebounded strongly to highs of 1.5659 on the back of the slightly less dovish Inflation Report (clearing supply at 1.5569). Barring this data triggered rally, it is highly possible that the pair is merely mirroring the moves in EURUSD, in which case we may be reverting to a sideways, range-trading environment (but with a slight bullish bias). We remain constructive on risk and cable a suspect the marginal recovery but on through very choppy trading. The next resistances is located at 1.5669 (intraday high), 1.5776 (27th July high), 1.5845 (22nd May high), 1.5954 (1st Mar pivot high). The break of supply zone at 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low).

USDJPY Despite the rally in US trsys we are seeing only a marginal spillover in USDJPY price action.
USDJPY continues to trade in a sideways range between 77.90 and 78.79. Not much to do here except exploit the range as neither the bulls nor bears have been able to mount a bona fide challenge to near term resistance or support. Should USDJPY break below the June 6th pivot low and downtrend top, the next areas of supply will be lying at 77.90 (1st Aug July low), 77.66 (1st June low), 77.36 (13th Feb low) then 76.58 (3rd & 17th Jan low). The next levels of resistance remain unchanged at 79.79 (3rd Aug high), 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 Unfortunately for our expectation of a near-term test of 0.9585, USDCHF reversal off 0.9657 support seems to be gather bids. With not much noticeable demand above this rally could have legs, however with volumes so low downside also look vulnerable. As we wait for a clear direction, we retain the view that a solid close below 0.9657 would open up a broader move to our extension target of 0.9585. Rebounds are likely to meet resistance at 0.9873 (8th Aug high & uptrend channel), 0.9900 (2nd Aug high), 1.0000 (psychological resistance), 1.0070 (1st Dec 11’ pivot high), 1.0149 (2010 pivot), then 1.0294 (10th Sept 10’ high). The first levels of support should be located at 0.9584 (5th July close, 6th July opening), 0.9419 (17th June low), 0.9369 (21st May Support), then 0.9183 (7th & 11th May low).

Resistance and Support: