Forex - GBP Under Heavy Selling Pressure

Forex News and Events: Overall trading has been insipid in the Asian session, a testimony to the lack of real drivers out there. And while we have seen some decent volatility in FX, pairs have not broken out of mid-term ranges. Interestingly, equity indexes continue to climb higher with S&P closing on the resistance at 1150, VIX safely below 20 and Crude prices steadily rising to $82.00bll. The Australian data was mixed with consumer confidence up 0.2% to 117.3, but owner occupied housing finance slipped -7.9% m/m vs -2.0% exp. The AUDUSD slipped on, with uninspired readings but was able to recovery as China’s better than expected export-import data and bullish comments from RBA’s Lowe, temporarily revitalized risk appetite. It will be interesting to see after the CNY revaluation hype wears off, if the AUD eroding interest yield differential is enough to keep the currency afloat. Interestingly, in New Zealand terms of trade index was up 5.7% q/q vs. 2.5% exp (largest gain since Q1 1976), which will only increase the focus on the RBNZ’s meeting tonight. The RBNZ is unanimously expected to keep rates unchanged at 2.50% so the focus will be on the language in the MPS. The recent rash of soft economic data has increased speculation that the first hike will be in July and not June. However, with inflation expectations growing steadily there is the possibility that Governor Bollard keeps the phrase “around mid 2010” and hint to a June or perhaps even April (long shot) start to the rate tightening cycle. The bills markets are completely unprepared for this type of event, with only 4bp of tightening priced in for April and 21bp through June. We believe that there is upside to the NZD, as the market is ill positioned for rate hikes, while the AUDs significant rate advantage is slowly eroding, making a short AUDNZD trade attractive. In recent days, the sterling has bore the brunt of risk reduction, political uncertainties, deficit concerns etc. Even a FT article which suggested that Barclay’s was actively looking to purchase a US retail bank provided traders with enough reasons to short GBP. Today’s UK Industrial Production will be critical, either providing the sterling with much needed support or refuel the QE debate and fuel further bearishness. While the risk “on /off” trade is as predictable as the weather, there is a growing bearishness today which has us looking for risk reduction trade within FX.

Today's Key Issues (time in GMT): 07:00 EUR GER Feb CPI - final, +0.2% m/m, +0.4% y/y exp; last -0.6%, +0.8%. 07:00 EUR GER Feb HICP - final, +0.2% m/m, +0.3% y/y exp; last -0.6%, +0.8%. 07:00 EUR GER Jan trade balance, E16.0 bln surplus exp; last E16.7 bln surplus. 07:45 EUR FRA Jan industrial production, +0.2% m/m exp; last -0.1%. 08:00 EUR ESP Jan retail sales; last +1.4% y/y. 08:30 SEK Jan industrial production; last +1.8% m/m, -5.8% y/y. 08:30 SEK Jan new orders; last +8% y/y. 09:00 NOK Feb CPI, core CPI, +2.6% and +1.9% y/y exp; last +2.5%, +2.3%. 09:00 EUR ITA Jan ind production, +0.6% m/m, -3.0% y/y exp; last -0.7%, -5.6%. 09:30 GBP Jan ind production, +0.3% m/m, -0.8% y/y exp last +0.5%, -3.6%. 09:30 GBP Jan mfg production, +0.3% m/m, +1.4% y/y exp; last +0.9%, -1.9%. 10:00 EUR ITA Q4 GDP, -0.2% q/q, -2.8% y/y exp; last +0.6%, -4.6%. 15:00 USD Wholesale inventories, %m/m (y/y) Jan 18:00 EUR ECB President Trichet speaks 19:00 USD Treasury budget, $bn Feb 20:00 NZD RBNZ official cash rate (%) 2.50% exp / prior 23:50 Revised real GDP, % q/q saar Q4

The Risk Today: EurUsd Well yesterday’s proposed uptrend within the 1.3444-1.3735 range was short-lived, as the pair slumped below 1.3580 support and is now firmly back into mid-range territory. Rather than show you the same tired hourly chart highlighting our now familiar range, this is a good opportunity to look at the longer term daily chart. More specifically I want to point out the hammer candlestick etched out during yesterday’s price action which once again nudges us toward the idea that the bears are running out of steam to push this pair lower and that the break out is eventually going to come to the topside. Obviously, the tenacity of the bulls has hardly been much to shout about either, as the 1.3700-35 ceiling has repeatedly held off corrective rallies and prevented a full-blown reversal higher. As things stand, we are edging closer and closer towards the upper bound of the major downtrend channel (today comes in at 1.3820), a trendline that will start to encroach upon our range as soon as the 18 March. Given the orderly decline since December 20009, we cannot dismiss the possibility that a retest of the major trend could lead to a resumption of the sell-off, so it will be critical for our bullish view that the 1.3425-44 range lows remain intact. For now the range remains king, but within the next two weeks we should see the definitive break-out we’ve long be anticipating. GbpUsd GBPUSD remains under the cosh today with sellers finding renewed vigour to push the pair down to 1.4886 lows so far –a support level last visited on 2 March. Despite our medium term assessment yesterday of the arguments in favour of a GBPUSD correction, the short term technicals clearly prefer playing a resumption of the 2 month downtrend, and really the final decision on where this pair is going will be decided by whether the 1 March lows at 1.4783 remain intact. The levels to watch on the upside will be 1.4980 weak supply, and the more significant downtrend resistance at 1.5050 –more importantly the crunch point where this downtrend meets the significant support at 1.4780 will be 17 March, but these things rarely wait until the last moment to break out so this move could come well ahead of that date. UsdJpy USDJPY continues to slosh around between the 89.50 pivot level support and the downtrend vibration channel –a trendline that now lies at 90.40 and is expected to attract sellers on the re-test. Arguably, the choppy price action over the past month has been just another massive range trade between 88.15 and 92.15, but we would tentatively use the former uptrend channel from mid-January to the end of February to draw a parallel uptrend vibration off the 88.15 lows, thereby giving us some reference to frame buying interest. Obviously we won’t be investing too much merit in this uptrend until we see a confirmed bounce off it, but the trendline currently comes in around 88.55, just below the support (and former mini-range lows) at 88.75, there may also be some buying interest gleaned off the 88.25 fibonacci level just below it (38.2% of 84.83-93.77). As discussed yesterday, for a continuation of the bullish move we need to see the pair overcome that downtrend resistance at 90.40, then the 8 March highs around 90.70; but above there we aim our sights straight up to 91.87 (200-day moving average) and 92.15 resistance beyond. UsdChf USDCHF continues its tight consolidation, but two attempts in the last 24 hours have failed to overcome the persistent area of supply around 1.0800-10, and this morning the pair has drifted lower to 1.0760. Any further move lower is likely find plenty of buyers around 1.0700 as the former support level also now coincides with 1 week uptrend support. The more significant level to watch is just below there at 1.0650 range lows, and it is this support which must hold firm for the bulls to launch another assault on the resistance levels above at 1.0800, 1.0830 and 1.0900.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3850 1.5615 92.15 1.0980 1.3800 1.5350 91.93 1.0900 1.3735 1.5278 90.70 1.0800 1.3587 1.4959 90.33 1.0760 1.3444 1.4857 89.50 1.0650 1.3425 1.4780 89.00 1.0605 1.3300 1.4700 85.15 1.0520 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot