English Pound Riding High

Daily FX - Can the British Pound Continue to Rally?

Published Date: February 19, 2004

The British pound is currently trading at 11-year highs against the US dollar. Although the GBPUSD is probably overvalued, the bullish bias of the pound both fundamentally and technically favors further gains in the pair over the near term. Ironically enough, the last time the pound was trading at these levels was in 1992, right before George Soros became known as the “man who broke the Bank of England.” Between March and August of 1992, the GBPUSD rallied from a low of 1.6975 to a high of 2.00. In September of 1992, George Soros leveraged the entire $1 billion value of his fund to take a $10 billion position against the pound. Other traders followed suit, causing the GBPUSD to slide over 900 pips or close to 5% in 24 hours. This forced the Bank of England to abandon the Exchange Rate Mechanism (ERM) while at the same time allowing Soros to make between $1-$2 billion in profits for his fund that day. Of course, Soros does not have the capability to move the market like he did in 1992 but nevertheless we find this bit of history rather interesting.

What is fueling the rally in the pound?

Vodafone Withdraws Bid for AT&T Wireless

The pound’s most recent surge through 1.90 can be partially attributed to the withdrawal of UK based Vodafone’s bid for US based AT&T Wireless. M&A flows are very important in the FX market. Cingular eventually won the deal, which was valued at approximately $41billion. The GBP was rallied following this announcement as the market readjusted their positions. Apparently a lot of people pre-hedged what they thought would be Vodafone’s requirement for dollars. The break above 1.90 occurred minutes before Vodafone confirmed the withdrawal of their bid.

Strong UK Fundamentals - Hiking bias

Strong UK fundamentals and a hiking bias by the central bank has led to strong gains for the GBP. In their latest inflation report, the Bank of England raised their GDP growth forecasts from 2.8% in 2004 to 3.6% in the first half of the year and then an easing to 3.25% for the remainder of the year. According to the latest releases, the UK economy grew by 0.9% q/q and 2.5% yoy in the last quarter of 2003. This is the fastest pace of growth in close to four years. The UK unemployment rate also fell to a 29 year low of 2.9% in January, as the number of people claiming unemployment benefits fell by 13,400, doubling expectations. In the latest BoE Inflation Report, BoE Governor Mervyn King went as far as saying that the sterling is still below the average level registered in 2000-2003, which suggests that the GBP has not yet reached a level that the BoE considers excessive. With a strong domestic economy and an ongoing global recovery, expectations are for the Committee to continue tightening monetary policy this year. The latest inflation report confirms this belief by pointing to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. The market is already pricing in another rate hike by June 2004 - with the market still fixated on earning yield, the GBP should continue benefit.

US Dollar Weakness

Despite the recent positive developments in the US, long-term fundamentals continue to favor USD weakness. The strength of last week’s US data still hangs over the market as it indicates that the recent weakness in the dollar has helped to boost exports. However, the market is currently debating the reliability and sustainability of the latest trade and Treasury International Capital (TIC) flow data. Those arguing that the recent slide in the EURUSD is merely a hiccup in the dollar’s longer-term downtrend are saying that the recent upturn in exports is a result of rising global growth. When growth in the US picks up, domestic demand for foreign goods are expected to accelerate, forcing the deficit to breakout of its temporary plateau and continue its previous trend. Furthermore, the 12-month average of foreign direct inflows is only enough to offset the negative flows and plug a part of the deficit, certainly not sufficient enough to cause a reversal of the deficit. For a reversal of the deficit to occur, the dollar would need to continue to depreciate.

Can the rally be sustained?

Technical Outlook

The intermediate-term view in the GBPUSD remains healthy above trendline support in the 1.8500 area. A sustained break below the 1.8820 10-day SMA/23.6 fibo (of Jan - Feb bull wave) is needed to confirm the key reversal day and open the way for a more aggressive decline to the 1.8580 former breakout level. A close above the 1.9000 handle clears the way for a test of the 1.9140. While the pair is clearly overbought on most oscillators, momentum remains strong after yesterday’s positive re-cross on the daily stochastics. Above the 1.9000-curved trendline support our bias is to the upside, with break below required to set in any sort of playable weakness.

Short- Term Fundamentals Favor Gains

As long as the dollar downtrend remains intact and sterling fundamentals continue to improve, the outlook for the GBP remains favorable. As we have mentioned before, the market expects another rate hike and the latest retail sales report for the month of January provides further confirmation. With the acceleration in consumer spending, the Bank of England may need to raise rates faster than “gradually.” As long as the Federal Reserve and ECB maintains accommodative monetary policies, the GBP should benefit. However, as soon as either central banks, but more importantly the Federal Reserve gives any hints that they are considering raising rates, the GBP’s medium term uptrend will come under attack. One of the primary reasons why the currencies such as the GBP, AUD and NZD are soaring is because they are the only central banks that have shifted from easing to tightening. Therefore there are three things we need to keep an eye on and that is - US and European monetary policies and dollar weakness. Both come hand in hand, as respite for the dollar will come when the US adopts a tightening bias.

Forex Trading News

Learn Forex Trading
With the EURUSD approaching its all time highs around 1.29, there has been a lot of speculation as to whether the European Central Bank (ECB) would actually intervene to sell euros against the dollar. The strength of the euro has sparked harsh rhetoric by European exporters who consistently cite dollar weakness as one of the primary reasons for their shortfalls in profitability. Comments from Eurozone officials indicate their distinct discomfort with the “brutal moves” in the euro. The influential head of the German IFO institute Hans-Werner Sinn called for the ECB to intervene in the foreign exchange markets to curb the euro’s rise. Sinn told a German newspaper that “the guardians of the currency could durably lower the (euro's) rate by 10 percent by selling 30 billion euros." However whether or not the ECB will intervene overtly still remains a question.

Previous ECB intervention

Since the launch of the euro on January 1, 1999, the ECB has only intervened four times, all in late 2000. The EURUSD took a downward spiral in the months following the launch of the euro, prompting the ECB to take action in concern “about the national and worldwide effects of the euro’s exchange rate, including its consequences for price stability” (ECB press release 11/03/00). The weakness of the euro has aggravated inflation by increasing import prices. However, the ECB was also struggling to prevent the market from losing confidence in their new “project” (currency). Although the ECB did not release details on the magnitude of their intervention, the Federal Reserve reported having purchased 1.5 billion euros against in the dollar on behalf of the ECB. All bouts of intervention caught the market by surprise. Unfortunately, the success of the ECB’s intervention was short-lived as the euro’s rise from 0.83 to 0.96 reversed course in 2001, prompting the pair to fall back to 0.84 in July 2001. The euro did not resume its rally until post 9-11, at which time falling confidence in the dollar and bleak outlook for the US economy dictated direction for the pair.

Will the ECB intervene again?

However, despite criticism from the corporate sector, the ECB will prefer to use threats and interest rate cuts rather than overt intervention to stem the euro’s rise. ECB Trichet’s warning about the “brutal moves” in the euro prompted the EURUSD to slide from 1.29 to 1.2425. We suspect the ECB’s comfort level with the euro is between 1.25 and 1.28. Although a stronger currency hurts exports and squeezes growth, as long as inflation remains under control, the ECB has the added flexibility of postponing overt intervention. Consumer price inflation in January was 2%, which is right in line with the ECB’s limit. For the previous 5 months, CPI has been above the bank’s 2% limit. A strong euro should put downward pressure on inflation, but the effects have been muted thus far. Furthermore, for intervention to be effective, the market would need to be overextended in some way. IMM positioning in the euro indicates that longs are not at extreme levels. Even though the EURUSD has risen 19% since last year, it is only 8% higher than the level that it was launched at in 1999. A rise in the euro is like tightening monetary policy, so we believe that the ECB is more likely to reduce interest rates before intervening overtly. Inflation is expected to fall below the ECB’s limit if the euro continues to appreciate. However, selling euros in the foreign exchange market would send a significant message to the market, which the ECB may fear undermines the market’s confidence in the euro. Furthermore, ECB intervention without US support would be much less effective. Japan has already expressed consent to helping the ECB intervene if necessary, but the US’ current comfort and satisfaction with the weaker dollar makes it unlikely that they would readily consent to buying dollars for the ECB.

Does Intervention Work? What are the Currency Implications?

The effectiveness of intervention also remains in question, as there has never been a consensus on the effectiveness of sterilized intervention, due to the discrepancies between the methodologies used in empirical studies of intervention. However, according to a report by Fatum and Hutchinson (ECB Foreign Exchange Intervention and the Euro: Institutional Framework, News and Intervention), there is evidence that intervention in the euro affects the exchange rate in the short term. Their findings are generally consistent with a similar pieces published by previous authors in 1993 and 1994. The report quantifies the effect of rumors and firm reports of ECB intervention on the value of the euro. Although the report is based upon intervention in support of the euro, which has been the only type of intervention to date, we will highlight it for benchmarking purposes. The findings indicate that rumors of ECB intervention are associated with an immediate 0.24% move in the euro (approx 30 pips), while firm reports of ECB intervention are associated with an immediate 0.66% move in the euro (approx 85 pips). Overt intervention by the ECB would signal that the euro is no longer a one-way bet, which should prompt a larger short-term move in the trading sessions following the intervention as speculators adjust their positioning. Therefore although the ECB is not likely to intervene below 1.30, if they do, it would certainly have a significant short-term impact on the EURUSD.

Learn Forex Trading

Learn Forex Trading
EURUSD

The EURUSD took off immediately following the release of Greenspan’s monetary policy report to Congress. In an unusual move, Greenspan talked extensively today about currencies in both his testimony and in the Q&A session. If you recall, at the last Humphrey-Hawkins testimony in July, Greenspan skirted any questioning about the dollar, saying that it was not within his realm of authority to comment on exchange rates. However, today, not only did he comment on currencies, but he went as far as saying that the dollar decline has been “gradual” and has had “no material adverse side effects (that) have been visible in U.S. capital markets.” Furthermore, he said that the weaker dollar is helping to reduce the current account deficit. Greenspan’s comments were less hawkish than the market expected, as he reminded the market that current monetary policy is appropriate and that “with inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation.” Last week’s comments from the Fed’s Bernanke led the market to believe that Greenspan would also be making some positive comments on the outlook for inflation, however, instead, the testimony chose to focus on the continual downward pressures on inflation. His comments effectively eliminate any possibility of a summer rate hike, which forced the market to adjust its expectations accordingly.

USDCHF

On the outlook for the US economy, Greenspan did not disappoint. He said that the economy has made “impressive gains” and that the “picture has brightened” significantly since his last testimony in July 2003. However, with regards to the labor market, he noted that the “progress in creating jobs has been limited.” With the economy losing 2.286 million jobs since President George W. Bush took office in January of 2001, Greenspan faced aggressive questioning with regards to his timing of a widespread recovery in the labor market. In December, the Bush Administration forecasts adding 2.6 million jobs this year and in response to questioning, Greenspan said that the forecast is “probably feasible.” He expects productivity growth to slow, which should help job growth. To date, “stunning” productivity gains has kept job growth limited. When questioned about Asian central bank holdings of foreign treasuries, Greenspan said that foreign selling of treasuries is not a major problem and that the market has “misplaced” concerns. He indicated that Asian central banks typically own treasuries with short dated maturities, which tend to have smaller-scale fluctuations. Greenspan will be repeating his testimony to Senate tomorrow - therefore it will once again be important to keep an eye on the Q&A session.

GBPUSD

The GBP soared as the Bank of England’s latest inflation report pointed to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. His economic outlook was very optimistic, as the bank forecasted GDP growth to hit 3.6% in the first half of the year and then ease to 3.25% for the remainder of the year. This is an upward revision to the Bank’s November forecast for 2.8% GDP growth for 2004. Further bolstering the GBP was January’s strong unemployment report. The UK unemployment rate fell to a 29 year low of 2.9%, as the number of people claiming unemployment benefits fell by 13,400, which was double market expectations. Today’s data pretty much solidifies another round of tightening this year.

USDJPY

The Bank of Japan is suspected of intervening in USDJPY as the pair ticked down to a low of 105.17 during Greenspan’s testimony. In line with Greenspan’s abundance of comments on currencies today, he also touched on the topic of the JPY during the Q&A session. Greenspan noted that the JPY would rise if the Ministry of Finance abandoned their intervention activities for a short time, however gains in the JPY should only be temporary. Keep an eye on tonight’s current account data - the global economic recovery should provide continual upward pressure on the current account balance, which means that we wouldn’t be surprised to see the current account rise to a record on a seasonally adjusted basis.

Forex Trading

Forex Trading
EURUSD

The EURUSD took off immediately following the release of Greenspan’s monetary policy report to Congress. In an unusual move, Greenspan talked extensively today about currencies in both his testimony and in the Q&A session. If you recall, at the last Humphrey-Hawkins testimony in July, Greenspan skirted any questioning about the dollar, saying that it was not within his realm of authority to comment on exchange rates. However, today, not only did he comment on currencies, but he went as far as saying that the dollar decline has been “gradual” and has had “no material adverse side effects (that) have been visible in U.S. capital markets.” Furthermore, he said that the weaker dollar is helping to reduce the current account deficit. Greenspan’s comments were less hawkish than the market expected, as he reminded the market that current monetary policy is appropriate and that “with inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation.” Last week’s comments from the Fed’s Bernanke led the market to believe that Greenspan would also be making some positive comments on the outlook for inflation, however, instead, the testimony chose to focus on the continual downward pressures on inflation. His comments effectively eliminate any possibility of a summer rate hike, which forced the market to adjust its expectations accordingly.

USDCHF

On the outlook for the US economy, Greenspan did not disappoint. He said that the economy has made “impressive gains” and that the “picture has brightened” significantly since his last testimony in July 2003. However, with regards to the labor market, he noted that the “progress in creating jobs has been limited.” With the economy losing 2.286 million jobs since President George W. Bush took office in January of 2001, Greenspan faced aggressive questioning with regards to his timing of a widespread recovery in the labor market. In December, the Bush Administration forecasts adding 2.6 million jobs this year and in response to questioning, Greenspan said that the forecast is “probably feasible.” He expects productivity growth to slow, which should help job growth. To date, “stunning” productivity gains has kept job growth limited. When questioned about Asian central bank holdings of foreign treasuries, Greenspan said that foreign selling of treasuries is not a major problem and that the market has “misplaced” concerns. He indicated that Asian central banks typically own treasuries with short dated maturities, which tend to have smaller-scale fluctuations. Greenspan will be repeating his testimony to Senate tomorrow - therefore it will once again be important to keep an eye on the Q&A session.

GBPUSD

The GBP soared as the Bank of England’s latest inflation report pointed to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. His economic outlook was very optimistic, as the bank forecasted GDP growth to hit 3.6% in the first half of the year and then ease to 3.25% for the remainder of the year. This is an upward revision to the Bank’s November forecast for 2.8% GDP growth for 2004. Further bolstering the GBP was January’s strong unemployment report. The UK unemployment rate fell to a 29 year low of 2.9%, as the number of people claiming unemployment benefits fell by 13,400, which was double market expectations. Today’s data pretty much solidifies another round of tightening this year.

USDJPY

The Bank of Japan is suspected of intervening in USDJPY as the pair ticked down to a low of 105.17 during Greenspan’s testimony. In line with Greenspan’s abundance of comments on currencies today, he also touched on the topic of the JPY during the Q&A session. Greenspan noted that the JPY would rise if the Ministry of Finance abandoned their intervention activities for a short time, however gains in the JPY should only be temporary. Keep an eye on tonight’s current account data - the global economic recovery should provide continual upward pressure on the current account balance, which means that we wouldn’t be surprised to see the current account rise to a record on a seasonally adjusted basis.

Learn Forex Trading

Learn Forex Trading

EURUSD

The highly anticipated G7 meeting failed to provide any support for the dollar. To Europe’s content, the statement released by the G7 portrayed their concern about the rapid acceleration in the euro. The statement was aimed at calming the markets and clarifying the Dubai communiqué. The European’s hand in crafting the statement was seen in the addition of the sentence “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These are the same words that European officials have been repeating since the euro broke above 1.25 and reflect the G7’s concession to acknowledging the abrupt weakness of the dollar. The lack of supporting comments for the dollar has cleared the way for a possible retest of the previous high at 1.2905. Looking ahead, there is an Ecofin council meeting of European finance ministers scheduled for tomorrow. Rumors are filtering through the market today suggesting that rate cuts and intervention will be discussed at tomorrow’s meeting. Austria’s Grasser tried to deny these claims, saying that these are topics that should be addressed by the ECB.

USDCHF

The US’ hand in crafting the G7 statement is also quite evident, as the statement retained the “flexibility” message and does nothing to suggest that the G7 wants to reverse the dollar’s decline. The lack of any restraint for the dollar indicates that the other G7 member countries understand that the dollar correction needs to continue in order to adjust the US external imbalance. The big event risk this week is Greenspan’s semi-annual Humphrey-Hawkins testimony on the economy. His words and responses to the Q&A session has the means to dictate the direction of the dollar in the weeks ahead. Greenspan is expected to express optimism about the prospects for the economy and job creation, but also caution that inflation remains low, therefore the Federal Reserve has the ability to postpone rate hikes. However, should Greenspan echo Bernanke’s recent comments on deflation (that risks have subsided substantially), the dollar may find moderate support. Onto Switzerland, the unemployment rate remained unchanged in January although the actual number of unemployed individuals fell for the third consecutive month.

GBPUSD

The GBPUSD soared to fresh 11-year highs despite generally weaker economic data. Industrial production unexpectedly slipped -0.1% m/m and -0.8% y/y during the month of December. Manufacturing output also fell for the second month on the back of weaker European demand. The pace of the gains in UK property values are also slowing, as the latest house price data from the Office for the Deputy Prime Minister (ODPM) indicate that the yoy rise in house prices has declined from 9.7% to 8.3%. The latest release reflects the satisfactory effects of the Bank of England’s first rate hike in November. If you recall, the Bank of England raised rates by another 25bp last week. However, improvements in the BRC retail sales index did help to offset some of the weaker data. Looking ahead, we are keeping a close eye on Wednesday’s unemployment and inflation report.

USDJPY

USDJPY remained essentially unchanged following the G7 meeting. Japanese government officials were very vocal in defense of their intervention activities both during the meeting and in private discussions with US Treasury Secretary Snow. Although the second new sentence in the G7 statement (“that lack such flexibility”) is aimed at Asia, Japanese Finance Minister Tanigaki repeatedly tried to clarify that the G7 message was not targeted at Japan. He said the Japanese yen has fluctuated just as much as the EUR has since September, therefore “Japan is NOT one of the countries that are lacking flexibility and that was understood at this G7 meeting.” He also added that, “every G7 country agreed that Japan’s currency regime is flexible.” Tanigaki is effectively telling the market that Japan intends to continue intervening in the yen.

Learn Forex Trading

Learn Forex Trading
Outcome of Boca Raton G7 Meeting

Published Date: February 9, 2004

G7 Clarifies Dubai Message - No Major Shift to Policy

In the G7 - What to Expect article that we released last week, we predicted that there would no major shift in policy at this past weekend’s G7 meeting. Taking a look at the statement released by the G7 finance ministers and central bank governors, we see that G7 officials used the most recent communiqué to clarify the message that they released in Dubai last year.

The following is the communiqué’s paragraph on FX:

“We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.”

Aside from the two new lines in bold, the statement remains identical to the one released in Dubai and effectively clarifies the Dubai message, reflecting a compromise between the US, Europe and Japan. To Europe and Japan’s content, the first line added was “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These are the same words that European officials have been repeating since the euro broke above 1.25 and reflect the G7’s concession to acknowledging the abrupt weakness of the dollar. The second new line (that lack such flexibility) is clearly directed at Asia. Without directly naming names (in particular, China), the G7 is calling for Asian countries to bear an equal burden of the dollar’s slide. Although this line may also appear to be directed at Japan, Japanese Finance Minister Tanigaki clarified the message over the weekend, saying that the G7 message was not targeted at Japan. The Japanese yen has fluctuated just as much as the EUR has since September, therefore “Japan is NOT one of the countries that are lacking flexibility and that was understood at this G7 meeting.” He also added that, “every G7 country agreed that Japan’s currency regime is flexible.” For the US, the statement retained the “flexibility” message and does nothing to suggest that the G7 wants to reverse the dollar’s decline.

Growth

The G7 statement was also very upbeat in terms of global growth. In contrast to the Dubai statement which started with “recent data indicate that a global recovery is underway,” the Boca Raton statement said that “the global economic recovery has strengthened significantly since our meeting in Dubai and risks have diminished.” The individual press conferences given by the G7 finance ministers and central bank governors also reflected this collective optimism. However, the G7 still feels that “much more remains to be done,” which suggests that member countries will be engaging in more pro-growth policies.

Dollar Downtrend Remains Intact

Therefore in no way does this statement change the direction of the dollar or put a floor under the dollar. The G7 wants the market to focus on the pace and distribution of the dollar’s decline - making sure that currency movements do not become excessive and calling for a more pronounced correction in the dollar against the Asian currencies.

The statement also indicates that the Europeans may not be completely uncomfortable with the current direction of the dollar - instead they want time to absorb and adjust to the dollar’s slide and corresponding euro rise. As indicated by recent European and more specifically German economic data, the negative effects of the gains in the euro has been limited thus far. Therefore 1.30/1.35 is still a possibility for the Euro.

Japan also staunchly defended their intervention policy at G7, arguing that the JPY has already shouldered a major part of the dollar correction. The statement contains no limitations or harsh words for Japan - which means that the Japanese will continue to cap gains in the JPY. Therefore although we believe that the long term USDJPY downtrend should remain intact as fundamentals prevail, in the short term, we expect to see repeated attempts by the Ministry of Finance to send USDJPY higher.

Learn Forex Trading

Learn Forex Trading

Technical Outlook
EUR/USD’s close on Friday above triangle trendline resistance at 1.2640 turns the technical picture emphatically bullish and favors an imminent resumption of the primary bull trend. Oscillators further bolster the bullish picture following Friday’s positive cross on the MACD. The 1/23 1.2779 swing becomes the next major level of resistance, with a break above required to negate the bearish implications of the weekly bearish engulfing and prolong upside momentum. An interesting trading day in USD/JPY on Friday as the pair underwent a clear short squeeze on a move through the 10 and 20-day SMAs. The failure slightly below the 50-day SMA and tail reversal close below the open on the daily however highlights a clear lack of resolve among bulls and favors an eventual test of the psychologically important 105.00 handle. Despite this overwhelmingly bearish technical picture, we still require a sustained break below 105.00 to confirm the start of another meaningful leg lower. Similar story in Cable as in EUR/USD after Friday’s close above 1.8430 trendline resistance. A break above the 1/23 1.8526 high is needed to negate the weekly bearish pattern and put focus back on the 1.8581 decade high. The pair remains vulnerable to a typical breakout-retracement scenario in the near-term but as long as support at former trendline resistance holds the outlook remains strongly in Sterling’s favor. A break below trendline support and a negative MACD cross in USD/CHF sets up a potential bear flag breakdown on the daily. Our key downside pivot remains the 1.2472 swing low, with a break below required to open the way for a renewed assault on the 1.2277 multi-year low. Allow for some corrective price action intraday, but below the 1.2400 handle bears remain firmly in control.

Chart of the Day - USD/CAD
On 01/19 USDCAD had a high at 3050 (above our 2950/2990 zone). A small retracement then occurred from the high and ended on the 2852 low on 01/20, 198 pts lower. The buck kept its momentum before breaking the 3000/3100 level on 01/23, S was found on the same area a couple of days later (low at 3037 on 01/27) before finally failing on 3440 (slightly below 3460/3500 zone), 588pts higher. Today the outlook is neutral as we remain in a healthy ST uptrend while we test major R. In fact, 3460/3500 is still a perfect entry for reversal players thanks to a robust Fibo confluence (50% Fibo from the Jul - Jan bear wave & 50% Fibo from the 03 - 04 bear wave) and the current Swing high. After a sustained break above 3500, the area will become S and 3700 will be the next target. On the bullish side, aggressive players will step up the 3150/3180 zone thanks to the 20 EMA and 38.2% Fibo from the Jan - Feb bull wave. Conservative range player types will wait for the 1.2600/40 zone to exploit the swing low and Lower BB. A breakout there would put 2400 and 2120/80 into play.

Euro USD News

Technical Outlook
EUR/USD’s failure yesterday at triangle trendline resistance favors continued range contraction. Intermediate-term outlook remains neutral within the triangle but above the 38.2% Fibo from the Nov - Jan bull wave we favor an eventual resumption of the long-term bull trend. Sustained break above 1.2650 short-term trendline required to trigger any sort of upside momentum. Intraday we favor the downside after yesterday’s inability to hold above the 20-day SMA. USD/JPY’s failure to develop downside momentum on the break of the 105.50 fib level makes the pair extremely susceptible to a short squeeze. Oscillator divergences and a positive cross on the slow stochastic further support the bull side and a potential upside run. 106.30 moving average resistance remains key, with a sustained break above required to trigger any sort of significant move higher. While the longer-term picture remains overwhelmingly bearish, we now require a break below the 105.00 handle to confirm a true resumption of the downtrend. More lackluster trade in USD/CHF as the pair remains confined to the triangle consolidation on the daily. We are still unclear whether the consolidation is a precursor to one last gasp higher or the calm before a resumption of the long-term downtrend. Below the 50-day EMA we favor the latter. Yesterday’s false break below the 20-day SMA and a hammer on the daily biases the upside intraday.

Euro USD Report

Learn Forex Trading

Technical Outlook
Further range contraction in EUR/USD yesterday as the pair was held to a mere 75-pip intraday range. Additional contraction in volatility is anticipated as the pair nears the apex of the 3-week triangle. Intermediate outlook remains neutral as long as the pair stays confined to the 1.2700 - 1.2300 area. Above the the convergence of the 38.2% Fibo from the Nov - Jan bull wave/50-day EMA however ST technicals slightly favor an upside break scenario. Our upside pivot remains the 20-day SMA, with a break above exposing the more significant 1.2779 1/23 high. No change in our take on USD/JPY. Two consecutive closes below the 105.50 fib zone continue to favor a grind lower and eventual test of the 105.00 psychological support area. Risk/reward on the downside is quite poor, however, as a clear lack of downside momentum makes the pair quite vulnerable to a classic short squeeze should sellers capitulate. Bulls would need to muster a move back above 106.30, however, to trigger anything significant. Rather dull price action in GBP/USD as the pair continues to consolidate within the daily triangle. Intermediate-term bias remains neutral until the stalemate is resolved. Short-term technicals slightly favor the upside after two consecutive closes above the 20-day SMA. Reaction at the upper triangle trendline (around 1.8450) is key in determining if the pair is set to break out to the upside or merely resume the consolidation. USD/CHF continues to consolidate around the 10-day SMA. Daily charts remain flat with no real directional bias favored until either resistance at the 50-day EMA or support at the 20-day SMA are cleared. If forced to take a side, we slightly favor the downside as multiple failures at the 50-day EMA indicate a potential conclusion to the current corrective phase.

Forex News

Forex News

Bank of England Rate Decision (12:00 GMT) (4.00%, 25 basis-point hike expected)



Expectations are for the MPC to raise rates by 25 basis points on Thursday. Solid December retail sales numbers and sustained growth in housing prices suggest that the November hike had little effect in slowing the economy. With Q4 GDP coming in at 0.9% for the quarter and both manufacturing and service sector activity growing at a healthy pace, the MPC will likely maintain its tightening bias, as markets look ahead to the next rate increase. Given that the MPC hikes rates, GBP/USD should get a lift in the wake of the announcement.





European Central Bank Rate Decision (12:45 GMT) (2.00%, no change expected)



Given the recent pullback in EUR/USD, the ECB will likely keep rates on hold at 2.00% following its Council meeting. While some Euro area policymakers have called for a rate cut to stem the euro’s rise, an easing on the eve of the G7 meeting this weekend would surely come as a surprise to the market.

Learn Forex Trading

Learn Forex Trading

EURUSD

Very quiet trading in the EURUSD today as Eurozone service sector PMI reports reflected acceleration in the pace of recovery for most of the region. The overall index for the Eurozone increased from 56.6 in December to 57.3 in January. The bulk of these gains were in the new business and expectations components. Italy was the primary laggard, with declines in all components aside from input prices. Although the PMI reports for Germany, France and Italy are all in expansionary territory (above the 50-mark), employment growth remains weak across the board, indicating that the strength in the euro may be denting business confidence. The ECB is scheduled to announce their monetary policy decision tomorrow - they are expected to leave rates unchanged. Nevertheless, the dollar continues to come under moderate pressure ahead of the G7 meeting, which begins this Friday. Today’s price action indicates that the market is readjusting positions after the recent comments from US government officials suggesting that the G7 will fail to provide any support for the dollar.

USDCHF

The dollar failed to recoup yesteday’s losses despite the sharp surge in service sector activity. The non-manufacturing ISM (Institute of Supply Management) index soared to a record high of 65.7 in January since the inception in 1997. This is the tenth consecutive month that the index has been in expansionary territory. US factory orders rose 1.1% in the month of December, while inventories remained unchanged, after falling 0.1% in November. Should this trend continue, companies would need to start restocking their inventories. Today’s data confirms that despite the weakness in the dollar, the US recovery is clearly underway. The manufacturing sector is also rebounding healthily, as suggested by Monday’s strong manufacturing ISM report.

GBPUSD

The Bank of England is expected to tighten monetary policy tomorrow by raising the repo rate from 3.75% to 4.00%. Since the last MPC meeting in January, economic data has only supported the need for another rate hike after the first round of tightening last November. According to the minutes from the January 7/8 MPC meeting, the Bank of England voted 8:1 to keep rates on hold. Although the market expected at least 2 members to vote in favor of a rate hike, the minutes were still quite hawkish and supported the argument for a move in February. GDP and retail sales both surprised on the upside, while gains were seen in the prices paid component of the PMI index and the HBOS house price index. According to Bloomberg, all economists surveyed expect a rate hike tomorrow. Furthermore, yesterday’s comments by the Treasury’s chief economic adviser Ed Balls pretty much solidify a rate hike. According to Balls, “: "There is now a consensus . . . that a forward-looking and pre-emptive approach to monetary policy, backed by a sound fiscal policy, is the best way to lock in stability."

USDJPY

The Japanese Yen fluctuated within a 38-pip range against the dollar today. There are reports that the Bank of Japan is estimated to have spent ¥1 trillion to ¥1.5 trillion this week on intervention. Going into the G7 meeting, action speaks louder than words when it comes to the Japanese. The recent behaviors by the Bank of Japan and the Ministry of Finance indicates that the Japanese has hardened their stance going into G7 and have no plans on wavering from their commitment of capping JPY strength. Aside from suspected bouts of repeated intervention in the days leading up to G7 (and record intervention in January), the Bank of Japan unexpectedly eased monetary policy in late January by increasing the target level of cash in the financial system from 27-32 trillion yen to 30-35 trillion yen. Japan is clearly committed to stimulating their economy and ensuring that their current pace of recovery and growth can be sustained. Therefore it is doubtful that they would consent to a statement that would undermine their ability to continue intervening.

Learn Forex Trading

Learn Forex Trading

EURUSD

Very quiet trading in the EURUSD today as Eurozone service sector PMI reports reflected acceleration in the pace of recovery for most of the region. The overall index for the Eurozone increased from 56.6 in December to 57.3 in January. The bulk of these gains were in the new business and expectations components. Italy was the primary laggard, with declines in all components aside from input prices. Although the PMI reports for Germany, France and Italy are all in expansionary territory (above the 50-mark), employment growth remains weak across the board, indicating that the strength in the euro may be denting business confidence. The ECB is scheduled to announce their monetary policy decision tomorrow - they are expected to leave rates unchanged. Nevertheless, the dollar continues to come under moderate pressure ahead of the G7 meeting, which begins this Friday. Today’s price action indicates that the market is readjusting positions after the recent comments from US government officials suggesting that the G7 will fail to provide any support for the dollar.

USDCHF

The dollar failed to recoup yesteday’s losses despite the sharp surge in service sector activity. The non-manufacturing ISM (Institute of Supply Management) index soared to a record high of 65.7 in January since the inception in 1997. This is the tenth consecutive month that the index has been in expansionary territory. US factory orders rose 1.1% in the month of December, while inventories remained unchanged, after falling 0.1% in November. Should this trend continue, companies would need to start restocking their inventories. Today’s data confirms that despite the weakness in the dollar, the US recovery is clearly underway. The manufacturing sector is also rebounding healthily, as suggested by Monday’s strong manufacturing ISM report.

GBPUSD

The Bank of England is expected to tighten monetary policy tomorrow by raising the repo rate from 3.75% to 4.00%. Since the last MPC meeting in January, economic data has only supported the need for another rate hike after the first round of tightening last November. According to the minutes from the January 7/8 MPC meeting, the Bank of England voted 8:1 to keep rates on hold. Although the market expected at least 2 members to vote in favor of a rate hike, the minutes were still quite hawkish and supported the argument for a move in February. GDP and retail sales both surprised on the upside, while gains were seen in the prices paid component of the PMI index and the HBOS house price index. According to Bloomberg, all economists surveyed expect a rate hike tomorrow. Furthermore, yesterday’s comments by the Treasury’s chief economic adviser Ed Balls pretty much solidify a rate hike. According to Balls, “: "There is now a consensus . . . that a forward-looking and pre-emptive approach to monetary policy, backed by a sound fiscal policy, is the best way to lock in stability."

USDJPY

The Japanese Yen fluctuated within a 38-pip range against the dollar today. There are reports that the Bank of Japan is estimated to have spent ¥1 trillion to ¥1.5 trillion this week on intervention. Going into the G7 meeting, action speaks louder than words when it comes to the Japanese. The recent behaviors by the Bank of Japan and the Ministry of Finance indicates that the Japanese has hardened their stance going into G7 and have no plans on wavering from their commitment of capping JPY strength. Aside from suspected bouts of repeated intervention in the days leading up to G7 (and record intervention in January), the Bank of Japan unexpectedly eased monetary policy in late January by increasing the target level of cash in the financial system from 27-32 trillion yen to 30-35 trillion yen. Japan is clearly committed to stimulating their economy and ensuring that their current pace of recovery and growth can be sustained. Therefore it is doubtful that they would consent to a statement that would undermine their ability to continue intervening.

Forex Trading

Forex Trading

EURUSD

Very quiet trading in the EURUSD today as Eurozone service sector PMI reports reflected acceleration in the pace of recovery for most of the region. The overall index for the Eurozone increased from 56.6 in December to 57.3 in January. The bulk of these gains were in the new business and expectations components. Italy was the primary laggard, with declines in all components aside from input prices. Although the PMI reports for Germany, France and Italy are all in expansionary territory (above the 50-mark), employment growth remains weak across the board, indicating that the strength in the euro may be denting business confidence. The ECB is scheduled to announce their monetary policy decision tomorrow - they are expected to leave rates unchanged. Nevertheless, the dollar continues to come under moderate pressure ahead of the G7 meeting, which begins this Friday. Today’s price action indicates that the market is readjusting positions after the recent comments from US government officials suggesting that the G7 will fail to provide any support for the dollar.

USDCHF

The dollar failed to recoup yesteday’s losses despite the sharp surge in service sector activity. The non-manufacturing ISM (Institute of Supply Management) index soared to a record high of 65.7 in January since the inception in 1997. This is the tenth consecutive month that the index has been in expansionary territory. US factory orders rose 1.1% in the month of December, while inventories remained unchanged, after falling 0.1% in November. Should this trend continue, companies would need to start restocking their inventories. Today’s data confirms that despite the weakness in the dollar, the US recovery is clearly underway. The manufacturing sector is also rebounding healthily, as suggested by Monday’s strong manufacturing ISM report.

GBPUSD

The Bank of England is expected to tighten monetary policy tomorrow by raising the repo rate from 3.75% to 4.00%. Since the last MPC meeting in January, economic data has only supported the need for another rate hike after the first round of tightening last November. According to the minutes from the January 7/8 MPC meeting, the Bank of England voted 8:1 to keep rates on hold. Although the market expected at least 2 members to vote in favor of a rate hike, the minutes were still quite hawkish and supported the argument for a move in February. GDP and retail sales both surprised on the upside, while gains were seen in the prices paid component of the PMI index and the HBOS house price index. According to Bloomberg, all economists surveyed expect a rate hike tomorrow. Furthermore, yesterday’s comments by the Treasury’s chief economic adviser Ed Balls pretty much solidify a rate hike. According to Balls, “: "There is now a consensus . . . that a forward-looking and pre-emptive approach to monetary policy, backed by a sound fiscal policy, is the best way to lock in stability."

USDJPY

The Japanese Yen fluctuated within a 38-pip range against the dollar today. There are reports that the Bank of Japan is estimated to have spent ¥1 trillion to ¥1.5 trillion this week on intervention. Going into the G7 meeting, action speaks louder than words when it comes to the Japanese. The recent behaviors by the Bank of Japan and the Ministry of Finance indicates that the Japanese has hardened their stance going into G7 and have no plans on wavering from their commitment of capping JPY strength. Aside from suspected bouts of repeated intervention in the days leading up to G7 (and record intervention in January), the Bank of Japan unexpectedly eased monetary policy in late January by increasing the target level of cash in the financial system from 27-32 trillion yen to 30-35 trillion yen. Japan is clearly committed to stimulating their economy and ensuring that their current pace of recovery and growth can be sustained. Therefore it is doubtful that they would consent to a statement that would undermine their ability to continue intervening.

Learn Forex Trading

Learn Forex Trading

Triple threats to dollar

Strong gains in UK CBI survey

Suspected intervention by Bank of Japan days before G7



EURUSD

In less than 24 hours, sentiment in the US dollar has shifted significantly. This dramatic change comes on the heels of a few breaking news/developments. The most notable and probably the biggest near term threat to the dollar is the discovery of the deadly toxin Ricin in the offices of Senate Majority Leader Bill Frist. After months of relative calmness, this discovery rekindled worries about the possibility of new terrorist attacks. The second important development relates to a twist to the G7 meeting. As we have previously discussed, the market originally believed that the dollar and the US deficits would be the major topic of discussion this weekend. However, last night’s comments from US Treasury official Taylor suggests otherwise. Taylor indicated that world growth will be the major topic of discussion, instead of currencies. To the disappointment of many, Japan’s former MoF official Sakakibara and US Treasury official Clariba also hinted that there is little chance the G7 will issue a statement reflecting a collective agreement to take active measures to halt the dollar’s decline. The dollar remains the focus and will dictate the movements in the euro for the remainder of the week. Eurozone unemployment remained unchanged at 8.8%, while PPI fell 0.1% m/m.

USDCHF

Aside from the Ricin discovery and G7 twist, the market was also very discouraged by the record $177billion Q1 borrowing requirement announced by the US. The twin deficits are a grave concern especially following yesterday’s White House budget forecasts. In today’s much anticipated speech by US Treasury Secretary Snow, he said that he intends to “take flexibility message to all countries.” With today’s words, he has clarified the US’ stance going into the G7. This is not the first time that flexibility has been emphasized. It suggests that the US is fully comfortable with the adjustment in the dollar and has no intentions of taking measures to reverse its current course - therefore expect to see the word flexibility appear again in this weekend’s G7 statement. Meanwhile, Switzerland posted its eleventh consecutive trade surplus in December. However, the surplus narrowed to 163.6 million francs from 1.12billion in November. Imports surged 15% yoy, suggesting a pickup in domestic growth.

GBPUSD

The GBPUSD ripped higher today on dollar weakness and a strong retail sales report. A survey by the Confederation of British Industry reported that heavy discounting helped to boost retail sales. Today’s report coupled with yesterday’s sharp surge in the prices paid component of the purchasing managers index puts significant pressure on the Bank of England to raise rates to 4% on Thursday. Although the BoE has suggested that any further tightening of monetary policy will be gradual and involve small to tighten monetary policy.

USDJPY

USDJPY continues to grind lower following comments from US Treasury official Taylor and former MoF official Sakakibara. Aside from the comments related to global growth, Taylor also recognized that Japan’s economy is vulnerable to currency swings, implying that the US may not criticize Japan for their intervention activities. If this is truly the case and the Japanese government knew about this beforehand, then it would provide a perfect explanation for Japan’s decision to ease monetary policy and intervene days before the G7 finance ministers meeting. Clearly Japan is not worried about undergoing verbal attack for their recent activities this weekend. Top MoF officials have even gone as far as saying that the G7 shares the same view on foreign exchange. Last night, the Bank of Japan is suspected of intervening once again, sending USDJPY soaring approximately 40-50 pips in a matter of minutes. The BoJ is expected to leave monetary policy unchanged on Thursday.

Daily FX

Latest Forex News

Technical Outlook
Little of note in EUR/USD trade as the pair remains wedged between two key moving averages (50-day EMA & 20-day SMA) in the 1.2375 - 1.2584 area. Given the lack of meaningful price action, intermediate-term technicals continue to support a position on the sidelines until the consolidation is more clearly resolved. From a shorter term perspective we slightly favor the upside as Friday’s failed attempt to breach the 50-day EMA support zone and yesterday’s positive cross on the daily stochastic give scope to a test of the upside of the channel. Short-term resistance comes into play at the 1.2584 20-day SMA and the 1.2700 ST trendline with a break above the latter required to open the way for an assault on the more significant 1.2779 1/23 high. USD/JPY continues to grind lower. Yesterday’s clear breach of the 105.50 fib zone (61.8% fibo of the ’95-’98 bull wave) hurts the bulls’ case and sets up a potential descending triangle on the daily. Extreme caution is warranted however as the pair approaches the psychologically significant 105.00 level. GBP/USD continues to consolidate within the daily triangle. In the intermediate term, our bias remains neutral until the range is resolved. Last week’s 1.8018 low remains our key short-term downside pivot, with a break below required to trigger more meaningful downside momentum and a test of the 1.7824 fib level below. Formidable upside resistance is seen at least week’s 1.8384 high with a break above exposing the more significant 1.8526 1/23 intermediate top. USD/CHF remains in consolidation mode. Lack of meaningful price action favors prudence until either resistance at the 50-day EMA or support at the 20-day SMA are cleared. For today, we prefer the downside as yesterday’s failure at the 50-day EMA and a negative cross on the daily stochs point to a test of the 10-day SMA.

Chart of the Day - EUR/JPY
EURJPY did not confirm the break below 136.00 (no multi lows above the level) and had a sharp correction ensued from 01/12 on. Two days ago the cross stopped its fall on the 30.76 Low. The ST outlook is bearish but the MT picture remains healthy since we are still above key S. 30.50/80 will in fact be a decent entry for bulls thanks to the 100 SMA, lower BB and 50% Fibo from the Nov - Jan bull wave. If the area breaks, 129 will become a perfect entry on bounces for the less aggressive bears. Aggressive bears will also not miss the 3460/90 area (the 50% Fibo from the Jan bear wave and ST Trend R). Above, the level to watch is 38.50/390, the robust 50% Fibo from the 92 - 00 bear wave.

Daily Forex News

[b]*USD/CHF Fails off 50-day EMA

*USD/JPY Multiple inside days point to coming expansion in volatility[b]

Technical Outlook
More violent intraday price action in EUR/USD on Friday as the pair tested and failed to break important support at the 1.2365 50-day EMA. Given the pair’s recent propensity for range trade, we prefer to stay on the sidelines until more significant levels are broken. Last week’s 1.2675 high becomes our key upside pivot while the 50-day EMA needs to fail on the downside in order to confirm the bearish daily descending triangle/1-2-3 reversal. Friday’s failure off the 50-day SMA favors the upside intraday, especially should 10-day SMA resistance give way. USD/JPY trade remains lackluster. Multiple inside days on the daily favor an explosive move in coming sessions as volatility reverts back to the mean. From a directional standpoint, we still slightly favor the upside as momentum divergences and multiple failures to breach the 105.50 long-term fib zone (61.8% retracement of the ’95-’98 bull wave) give scope to a catchable upside squeeze. A daily close below 105.50 however would negate potential reversal signs and set up a downside test of important psychological support at 105.00. More range contraction in GBP/USD as the pair settles into a broad symmetrical triangle on the daily. Given such clear consolidation in the intermediate term our bias remains neutral until more significant levels are violated. Last week’s 1.8018 low remains our key short-term downside pivot with a break lower required to trigger more meaningful downside momentum and a test of the 1.7824 fib level below. Formidable upside resistance seen at least week’s 1.8384 high with a break above exposing the more significant 1.8526 1/23 intermediate top. USD/CHF continues to struggle with resistance at the 50-day EMA. Break above moving average resistance and the 1.2730 swing high further above required to trigger the ascending triangle on the daily and prolong bullish momentum. For today, risk remains skewed lower following Friday’s failure, though bears will need to pierce support at the 1.2440 20-day SMA for anything significant to develop on the downside.

Chart of the Day - EUR/CAD
On 01/14 EURCAD had a low at 6133 before a small rally to the 6393 High the same day, 260pts higher. A false break then ensued to the 6060 Low (no confirmation of the breakout with lower lows) before a subsequent rally to the 6705 High on 01/23 (slightly above our 6660/6690 area). The cross then failed on the level to reach the 6322 Low on 01/27, 383pts lower. The same scenario has played itself out over the few past days with a High at 6702 on 01/28 and a low at 6446, 256 pts lower on 01/30. Today the outlook remains bullish. Aggressive buyers can look to step up in the 6420/40 area thanks to the 20 EMA and 61.8% Fibo from the Dec - Jan bear wave. More conservative bulls will use the 6250/6280 area thanks to the 50 SMA and Fibo confluence (23.6% Fibo from the Sep - Jan bull wave & 76.4% Fibo from the 03 bear wave). Even though the area may have lost som validity; 6700/6750 will still attract some bears thanks to the swing High and upper BB. A breakout would turn the area into S and target 6870 and 7100. The outlook would become bearish if 6200/6250 is broken with conviction (multi-closes). Retracements into the area would then become good risk rewards entries for the bears. 5900 and 5500 would be targets on the downside.