British Pound, Euro Lag on Weak June CPI Figures; AUD/USD Up on Fed

DailyFX

ASIA/EUROPE FOREX NEWS WRAP

High beta currencies and risk-correlated assets are performing well on Tuesday as speculation around the US Dollar, ahead of Federal Reserve Chairman Ben Bernanke’s two day testimony in front of Congress, continues to grow more bearish. The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR), down just over one half of one percent, has erased all of its gains since Friday, and appears poised to trade back to Thursday’s lows, the lowest levels since June 27.

In this comment yesterday I noted that there were two key prints due out of the US before Wednesday’s testimony: the June Advance Retail Sales report; and the June Consumer Price Index. Although consumption has been a brighter spot in recent months, given yesterday’s miss, and in context of today’s inflation data, the US economy simply isn’t growing fast enough to warrant a withdrawal of stimulus. It thus appears that Chairman Bernanke is set to bring a dovish rhetoric with him when he climbs Capitol Hill; which could spur demand for US Treasuries (causing yields to fall) and thus a weaker US Dollar.

The Australian and New Zealand Dollars have had prime real estate for taking advantage of the US Dollar weakness, especially after the Reserve Bank of Australia issued a less-dovish tone than expected as per the July meeting Minutes. It is very important to consider positioning right now: investors remain heavily short the Australian Dollar – in fact, the most short ever. In the short-term, RBA and Fed policy may be diverging in a way that’s favorable for a short covering rally in the AUDUSD; today, it is easily the best performer.

Read more: Chinese GDP Sets Table for Improved Risk amid CPI Data from EZ, UK, US

Taking a look at European credit, government bonds have rebounded across the board (including Portugal – 2-year note yield -24.7-bps to 5.059%) as weak Euro-Zone CPI and German ZEW figures may be spurring the belief that the ECB will continue to press forward with its accommodative policies. The Italian 2-year note yield has decreased to 1.680% (-0.1-bps) while the Spanish 2-year note yield has decreased to 1.967% (-3.7-bps). Similarly, the Italian 10-year note yield has decreased to 4.451% (-1.4-bps) while the Spanish 10-year note yield has decreased to 4.658% (-5.1-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:00 GMT

AUD: +1.42%

NZD: +0.92%

CHF: +0.60%

JPY:+0.51%

EUR:+0.41%

CAD:+0.13%

GBP:+0.05%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.53% (-1.40% prior 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS OUTLOOK

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EURUSD: Yesterday I indicated that “short-term price action is thus biased lower unless $1.3200/10 is breached.” However, with back-to-back Hammers on the daily chart amid price recovering the 50% retracement of the July low/high, it appears that a retest of the critical 1.3175/245 zone may be necessary before another dip. Overall, a [weekly] close below 1.2800 tentatively triggers the broader H&S pattern, whose measured move points to a return to the June 2010 lows near 1.1875.

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USDJPY: No change: “The rejection of the 76.4% Fib retracement at ¥101.35/40 (May high to June low) is only a near-term setback, as the break off of the late-May to mid-June correction in the pair completed the last week of June. …longs preferred into early next week. Indeed, the 50% retracement of the June low to July high at 98.75 held as support and the pair has already bounced higher; a run at 102.00 shouldn’t be ruled out this week.” A daily close below 98.75 negates this bias; a move to 97.00 would be anticipated on a reversal lower.

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GBPUSD: No change: “Big picture: the GBPUSD broke the uptrend off of the 2009, 2010, and 2012 lows, signaling the beginning of a greater selloff towards 1.4200/50. Any rallies in the pair look to be sold; price could climb to 1.5290 (50% Fib March low to May high) on a rebound now that the GBPUSD has broken through RSI trend support off of the March 12 and May 29 lows. Price has undercut key Bear Flag support off of the March 12 and May 29 lows; and now the move towards 1.4200 appears to have begun. The rally the past [few] days has seen price trade back to the underside of the Bear Flag, and ideal selling opportunity.”

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AUDUSD: Despite chopping around and through said level, the AUDUSD has more or less held the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie. “Bullish divergence on the daily chart has formed once more, suggesting that consolidation or perhaps a small rally back towards 0.9330/420 is due; or another quick, sharp drop is necessary to clear the technical discrepancy.” Alternatively, a Bullish Broadening Wedge may be forming at the lows as a base; 0.9750/75 would be the target on a close above 0.9415.

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S&P 500: No change: “Now price finds itself on its way towards mid-June swing highs and the 76.4% Fib retracement (May high June low) at 1655/60. Gains have accelerated, with the S&P 500 achieving the 88.6% Fib retracement at 1672/75 overnight; a test of the yearly and all-time high at 1687.4 shouldn’t be discounted yet.1640 is key support for bulls.”

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GOLD: No change “Gold has fallen into the 10/20 RSI support region, where price has held on numerous probes lower ultimately producing a short-term rally. More recently, daily RSI has only dipped into this region in mid-February and mid-April…Basing just below $1200/oz shouldn’t be dismissed, as at 1189.91 lies the 100% extension of March high/April low/April high move, as well as the 61.8% extension of the October high (post-QE3 announcement)/April low/April high move at 1192.” It should be noted that the rally off of Friday’s low has produced a maximum of +10.02% so far, eclipsing the rebound seen from late-May to early-June, when Gold rebounded by +6.36%.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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