Forex - Green shoots gets a reality check – risk aversion creeps back into markets – are we nearing the end of the correction?

Forex News and Events: Recent market developments and commentary from government officials has refocused the dollar as the only available reserve currency. India, Japan and Korea have all expressed their conviction that only the dollar could be considered a viable option as a global reserve currency – this and the Chinese government reassuring Treasury Secretary Geithner that they would continue hold their “partnership” in high regard and remained committed to buying U.S Treasuries. These political considerations have kept markets quite choppy throughout previous sessions. EURUSD traded lower yesterday – the bears failing at 1.4110. The unwillingness for the pair to break out of it’s 1.4100 – 1.4250 range highlights the fact that this consolidation period is needed for markets to take heed of all recent developments before deciding on a clear direction. While the dollar remains bearish in the long term just how far the retracement will go puts a question mark on immediate longs in the pair. Yesterday’s ADP report came out in line with expectation and provided little impetus for the dollar. This said, the focus is now on Europe. Will the EU’s conservative stance on rates and intervention prove the right direction in the long run? Trichet’s comments today after the rate decision at 11:45 GMT will be the main focus in the news as the rate is expected to stay the same. Comments on “unconventional measures” and so forth will be the main impetus for markets. The cable has been the superstar pair lately, trading at a 7-month high and up a massive 21% since March. The incredible bullish move by the Sterling has been down to improvements in domestic data and sentiment, how much of this is down to the government’s QE program is difficulty quantifiable. The BoE meets today to discuss rates (11:00 GMT) and are largely expected to keep rates the same. As with the ECB the comments by the MPC on their asset purchasing scheme – and whether or not to extend the scheme will be crucial. The MPC already increased their GILT purchases by £50Bn to £125Bn and are largely expected to put a cap at £150Bn. Ahead today BoE and ECB rate decisions with press conferences (11:00 GMT and 11:45 GMT respectively). In the U.S we have Initial jobless claims ahead of tomorrow’s NFP’s due at 12:30 GMT.

Today's Key Issues (time in GMT): 09:00 EUR Retail sales, % m/m (y/y) Apr 0.2 (-3.1) exp, -0.6 (-4.2) prior 11:00 GBP BoE MPC Bank Rate decision, % Jun 0.50% exp, 0.50 prior 11:45 EUR ECB rate announcement, % Jun 1.00% exp, 1.00 prior 12:30 EUR ECB press conference - Latest macroeconomics projections published 12:30 USD Final non-farm productivity, % q/q (y/y) 1.2(1.8) exp, 0.8 (1.7) p 12:30 USD Final unit labour cost, % q/q (y/y) Q1-F 2.9 (2.3) exp, 3.3 (2.4) P 12:30 USD Initial jobless claims, thous (4wk mvg avg) 30-May 623 (627) prior 12:45 USD Fed Chairman Bernanke gives welcoming remarks at a conference on financial markets and monetary policy 13:00 CAD BoC interest rate announcement, % Jun 0.25 exp, 0.25 prior 14:50 EUR ECB's González-Parámo speaks at Risk Europe conference in Frankfurt

The Risk Today: EurUsd correction yesterday remains above crucial 1.4050 level which points to a constructive and healthy up-trend for the time being, however the rounded top formation points to a strong trend reversal, crucial test at 1.4150. While range will continue for the time being NFP’s tomorrow may provide the impetus needed for a true breakout. Initial resistance at 1.4200 and 1.4269 with a cap at 1.4340 – however our mid-term view points to a 1.4450 target to the upside. On the downside initial support stands at 1.4150 with crucial floor in at 1.4050. GbpUsd The strong correction yesterday hit the 1.6288 (23.80% retracement level on the move that took us from 1.5070 to 1.6665 in the past month). While the bullish trend remains this has put some weight to the retracement theme and has refocused the pair to the downside in the very near term. Initial support stands at 1.6216 and 1.6055 (50.00% Fib level) with a floor in at 1.5957. UsdJpy We have seen the pair trade and consolidate into a wedge formation in recent sessions as markets toyed with risk averse sentiment for sometime. If risk aversion continues to plague sentiment the Yen will erase the dollar’s recent gains. Initial support stands at 96.30 with a floor in at 95.53. On the upside 96.80 is the crucial test for gains with a target at 99.56 via 97.25. UsdChf General trend is still very much bearish as retracement fails at 1.0695, however strong dollar impetus may shift bias long (medium term) if we manage to break 1.0750 which would aim for 1.0956. This said all signs point to the mid to long-term target being parity. Initial support at 1.0644.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4340 1.6662 99.56 1.0956 1.4269 1.6491 97.25 1.0750 1.4200 1.6420 96.80 1.0695 1.4144 1.6360 96.59 1.0699 1.4150 1.6216 96.30 1.0644 1.4110 1.6055 95.03 1.0602 1.4050 1.5957 95.53 1.0500 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot