Forex - Waiting on the BoE & ECB

Forex News and Events: We still can’t shake the admission from the Greek Prime Minister that there were “holes” in the budget and tax collection was in “shambles”. While markets have initially embraced the Greek announcement of a 3rd set of new austerity programs, we have a hard time believing that these optimistic goals are actually attainable. It’s easy to austerity “grandstand”, the hard part is execution and we are uncertain Greece has the infrastructure and willpower to execute. Getting nearly no press was today’s sit-in at the Finance Ministry by hundreds of communists from Greece's All-Workers Militant Front protesting new “draconian measures”, a trend we expect will accelerate (general strike scheduled for March 16th). When you cut through the hype, including speculation of hedge fund conspiracy to demolish the EUR, what the Greek government is proposing is a colossal task which few countries have achieved. First of all, historically European nations have had the advantage of a reduction in short term rates and significant currency devaluations, options which are off the table for Greece. And secondly, with roughly €21bn in fiscal tightening combined with general sluggishness in economic recovery any Greek growth projections have significant downside risks. And this doesn’t even address the potential social response. We remain bearish on the EUR and see short term optimism due to progress in bailout discussions and austerity measures as opportunities to short the single currency. Today provisional estimates of Q4 GDP are expected and weaker figures will compound the Greek problem (as discussed above). Today, markets will be watching the BoE and ECB. The Bank of England is expected to keep rates on hold at 0.50% this month and to maintain its asset purchase target at GBP 200bn for the time being. The risks however, have been gradually shifting towards a possibility of the resumption of quantitative easing just a month after the MPC signaled a pause. Voting member David Miles asserted in a speech last week that “there are still more risks of growth not recovering to more normal levels than of substantially exceeding it”, and Governor Mervyn King also erred to the dovish side in his recent address to the Treasury. With the high level of uncertainty abound in Europe as a whole, the recent slump in GBPUSD is no doubt indicative of the market already starting to price in an increase to the asset purchase target in coming months. After last week’s massively underwhelming Eurozone inflation print at -0.8% MoM, and the ongoing concern about the PIGS, it is unsurprising that analysts are universally predicting an unchanged decision from the ECB (rates currently 1.00%). The market will however want to hear from Trichet what the next steps will be in the gradual withdrawal of emergency lending measures. The ECB President is likely to affirm that rates remain ‘appropriate’, but given the dramatic slump in EURUSD of late, the more important details will be what Trichet’s opinions are on the prospects for Greece and the proposed German-led bailout plan.

Today's Key Issues (time in GMT): 07:45 EUR FRA Q4 ILO unemployment; last 9.5%. 10:00 EUR Q4 GDP - revision, +0.1% q/q, -2.1% y/y exp; last +0.4%, -4.1%. 12:00 GBP UK: BoE MPC Bank Rate decision, %Mar hold 0.50 prior 12:00 GBP UK: BoE MPC asset purchase target, £ bnMar 200 prior 12:45 EUR ECB rate announcement, %Mar 1.00 exp/prior 13:30 EUR ECB press conference - Latest macroeconomics projections published 13:30 USD Q4 productivity - final +6.5% q/q exp; last +6.2. 13:30 USD Q4 unit labor costs - final, -4.6% q/q exp; last -4.4%. 15:00 USD Jan factory orders, +1.9% m/m exp; last +1.0%. 15:00 USD Jan factory orders ex-transport, +0.3% m/m; last +1.2%. 15:00 USD Jan pending home sales index, 97.6 exp ; last 96.6. 18:00 USD Chicago Fed President Evans (FOMC non-voter) speaks 18:15 USD St. Louis Fed President Bullard (FOMC voter) speaks

The Risk Today: EurUsd Yesterday’s jab through the upper bound of our trusted range met with a ceiling of sellers just above at 1.3730-35, and despite the daily close above 1.3700 we have since slumped back towards 1.3650 levels this morning. Interpreting this price action is tricky. On the one hand we may simply continue range trading within a slightly widened band (1.3425-1.3800 seems the most likely area) or resume the breakout rally higher. In our view, this breach of the 1.3700 level is indicative of a market itching to break out, and we would be reluctant to short this one again in the short term. Instead, we look to scale into longs toward 1.3630 levels (coinciding with the back side of our downtrend channel), and look for bids to come in again at 1.3580. Our first target on the topside would be just ahead of 1.3800 (50% fib retracement of 1.2457-1.5145), then beyond at the major pivot 1.3850. As touched upon yesterday, if the reverse scenario plays out and we see a break through our range lows (1.3425-44), nearest support is seen at1.3090, then 1.2890 GbpUsd The impending BoE meeting means there’s likely to be some volatility today as the market grapples with the arguments for and against more QE. GBPUSD rallied strongly in yesterday’s session to hit a high of 1.5133, however the upward-sloping consolidation looks to be etching out a rising wedge formation on the hourly chart which suggests bearish price action to come. Although this formation is more favourably spotted as a reversal pattern, if confirmed here, it would represent a bearish continuation pattern. The resistance levels above to watch will come in above at 1.5190, then the upper bound of the current 6 week downtrend at 1.5255 followed by 1.5350 major pivot. On the downside we remain vigilant of the lower edge of the rising wedge coming in around 1.5025, and below there look to first target 1.4857 (61.8% fibonacci retracement of 1.3505-1.7043), then 1.4780 lows from Monday. UsdJpy Persistent selling pressure in recent days has finally exhausted the USDJPY bulls around 88.50 levels, indicating that the recent consolidation phase is over. The price action this week looks to be carving out a short-term downtrend channel; with the upper bound of 88.61 likely to attract sellers caught out on the break lower through the bottom of the consolidation range. Overnight the grind lower has touched 88.14 levels, and beyond the psychological 88.00 level the next recognized support does not come in until the 9 December lows at 87.37, which suggests that the path of least resistance from here is for a resumption of the 2.5 year major downtrend. On the topside the technical levels are stacking up at 89.50 prior range highs, the 100 day moving average at 90.18, and the 50 day moving average at 90.66. UsdChf Yesterday’s turn of USD weakness pushed USDCHF down through the 1.0695 range lows, but the sell-off was halted by bids at 1.0650 support level, and since then we have bounced back above 1.0700. Given the breach of the short term uptrend at 1.0710 yesterday, there is very little directional bias to take our lead from at the moment, so there may well be a resumption of the range trade within these wider perimeters (1.0650-1.0900). If however this bout of USD weakness continues, next supports of note are 1.0605 (38.2% fib retracement of 1.0131-1.0898) and the back side of the former downtrend at 1.0520 (also coinciding with the 50% fib retracement level).

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3850 1.5615 90.66 1.0980 1.3800 1.5380 90.18 1.0900 1.3735 1.5255 89.50 1.0800 1.3665 1.5050 88.25 1.0710 1.3444 1.5025 88.00 1.0650 1.3425 1.4857 87.35 1.0605 1.3300 1.4780 85.85 1.0520 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot