USD rally slows, EUR grinds lower

Market Brief

In the second day of her semi-annual testimony, FOMC Chair Yellen faced the Financial Services Committee. Yellen said that the economic recovery should lead to the end of the QE program in October, and yet declined to specify timing for the main Fed fund rate hike. The main exit tool would be the IOER (interest on excess reserves) rise, with limited flexibility on use of RRP to insure financial stability. She insisted on the fact that no mathematical formulas should be set to conduct Fed’s policy as such rules would be a “grave mistake” and would only limit Fed’s independence. In addition, Fed Fisher said that the rate hike may come by next year or sooner, adding that he doesn’t see interest rates rising sufficiently to damage Fed’s portfolio. USD rally slowed, DXY index consolidates gains at about 80.500 – a month high levels, while the US 10-year yields seem little convinced, unable to break above 50/100-dma at 2.5668/70 respectively. USD/JPY couldn’t make it higher than its 21-dma (101.71), technicals are perfectly neutral waiting for fresh direction.

EUR/USD extended losses to 1.3521 post-Yellen and remained tight ranged in Asia. If the pair holds ground above yesterday and the Asian session low (1.3521), the formation of tweezer bottom should signal a minor bullish reversal. Yet the bias is clearly negative. The key support zone stands at 1.3477/1.3503 (2014 low/June 5th ECB reaction low). Decent option barriers are seen pre- 1.3550/80 for today expiry. Euro-Zone releases final inflation report in June and the expectations remain soft. EUR/GBP cleared support at 0.79000 and legged down to 0.78888 overnight. Short term technicals signal the end of the upside correction. Decent option barriers trail above 0.79000 for today and Friday expiries.

In UK, the unemployment rate improved to 6.5% in May, while the earnings growth disappointed over the same month. GBP/USD’s bullish momentum cooled down in London yesterday. The pair is still in June-July ascending channel, bids are seen at 1.7096/7100 (21-dma / optionality). No barriers are eyed on the upside. Resistance are placed at 1.7180/92 (year high levels) and then 1.7270 (uptrend top & 30-day upper Bollinger band).

Offers in AUD/USD remain solid pre-0.9400 (21-dma/optionality), light stops are eyed above. The key short-term support is at 0.9330/39 (June 16th low / Fib 61.8% on Oct’13 – Jan’14 pullback). AUD/NZD breaks above 1.0751 (Fib 76.4% on Oct’13 – Jan’14 drop) mainly due to selling pressures in NZD. The short-term technicals are now positive suggesting deeper upside correction to 1.0820/23 July highs. NZD/USD extends weakness to 0.8683 despite 5.7% increase in jobs advertisement in month to June. Dip-buyers are still willing to stay given the rate expectations. The RBNZ gives verdict next week.

As widely expected, the BOC kept the bank rate unchanged at 1.00%. USD/CAD rallied to 1.0794 for the first time since June 20th, as the Canadian policy makers said that the latest inflation pick-up should remain temporary. The BoC Governor Poloz aims to keep the CAD weak to maintain favorable conditions for stronger exports and business investments. USD/CAD trades within our key 1.0550/1.0800 range, with solid offers on the upper end and stops eyed above 1.0800. Option bids are eyed at 1.0750/75 for today expiry.

The economic calendar of the day: Eu27 June New Car Registrations, Euro-Zone May Construction Output m/m & y/y, Euro-Zone June (Final) CPI m/m & y/y, Italian May Current Account Balance, Canadian May International Securities Transactions, US June Housing Starts and Building Permits m/m, US July 12th Initial Jobless Claims and July 5th Continuing Claims and Philadelphia Fed July Business Outlook.