Forex - Fed Comments Cause a Disproportional Stir in USD

Forex News and Events: FX markets continue with their choppy, noncommittal trading pattern. But as investors concerns ease and EU spreads tighten significantly, markets are leaning towards selling USD (interestingly not case with other safe-have FX trades like JPY and CHF) and buying of risky assets. But given that summer trading pattern is in full effect, we are seeing a variety of small time news events having a distortional effect on prices. Case in point, St Louis Fed President Bullard's comments that linked the US inflation path with that of "a Japanese-style deflationary outcome within the next several years," advocating the possible need for the expansion of Treasury purchases. Given the Fed presidents more hawkish reputation, “the north pole of inflation hawks,” he was once quoted saying, (and lack of news flow) the market jumped on the statement. However, this deflationary argument has been well vetted and is currently the flavor of the month, so its not truly original. In addition, he goes on to say that no further easing will be needed and the fed is prepared to fight a negative shift in price pressures. Less covered was Dallas Fed President Fisher comments that he believed that deflation was only a tail risk and that further monetary policy easing would be not be required. When asked it the Fed would partake in monetizing the US huge fiscal debt he stated, "We know what happens when central banks give in to those requests - it leads us down the slippery slope of debasing our currency and puts us on the path of hyperinflation and economic destruction." But in actuality none of these comments and ideas should be surprising to participants, and the market shouldn’t try too hard to dissect subtle divergence in opinions (especially in Fishers case to a group of Texans). The Fed is clearly cautious and uncertain over growth (highlighted in recent economic data and beige book) and the lack of confidence will come out in statements. While the USD will react, we suspect that the FX effect will be short lived and that there will be opportunities to trade against the tide. In our mind, yesterdays CHF trading pattern is one to watch. Starting in the European session, markets were buzzing with reports that the SNB was unwinding part of their massive reserve. And combined with the announcement that the Swiss central bank would begin to mop up excess liquidity, it has raised the probability of a near term policy shift. We believe the CHF will be a triple threat, with gains from widening interest rate differentials (suspect an early fall hike), reserve selling and health fundamentals, all giving the CHF a lift. Watch for the EURCHF to trend lower. In Japan , a steady stream of direct comments at the JPY resurgence hit the wires. FM Noda stepped into the fray stating that he’s watching FX moves carefully (a Yen boilerplate statement) while Vice-FM Ikeda later followed up to say: "I will not comment on levels but generally speaking, I'm worried about the impact it may have on Japanese exporters, which have been a driving force (for the economy)." Headline Japanese CPI fell to -0.7% vs. -0.9% prior for the 17th consecutive month (although at a slower pace) and Industrial Production also slumped. We suspect that policy makers will overlook the slight shift in pace of decline and will still look towards monetary policy easing, as an viable escape mechanism. That said we are strong buyers of EURJPY and USDJPY at these levels, as we suspect that Japanese policy makers will proved a backstop. As for today the US GDP will be the highlight of the day. As with deflation, “Double Dip” predictions are back in fashion and a weak number (supported by soft economic reading recently) will only exacerbate the theory and kill the USD.

Today's Key Issues (time in GMT): 00:00 SEK Russia Interest rate announcement, % 7.75 exp/prior 07:30 SEK May labor cost index. 07:30 EUR Q2 GDP, +1.0% q/q, +3.3% y/y; last +1.4%, +3.0%. 08:00 EUR ITA Jun PPI, +0.2% m/m, +3.4% y/y eyed; last +0.5%, +3.6%. 09:00 EUR Jul HICP - flash, +1.7% y/y eyed; last +1.4%. 09:00 EUR Jun unemployment, 10.0% eyed; last 10.0%. 09:00 EUR ITA Jul CPI - prelim, +0.2% m/m, +1.5% y/y eyed; last unch, +1.3%. 09:00 CHF ITA Jul HICP - prelim, -0.9% m/m, +1.8% y/y eyed; last +0.1%, +1.5%. 09:30 EUR Jul KOF sentiment indicator, 2.30 eyed; last 2.25. 10:00 USD ITA Jun unemployment, 8.8% eyed; last 8.7%. 11:00 USD St Louis Fed Bullard on CNBC. 12:30 USD Q2 GDP - advance, +2.3% AR eyed; last +2.7%. 12:30 USD Real PCE, % q/q saar 12:30 USD Q2 core PCE price index, +1.0% AR eyed; last +0.7%. 13:45 USD Chicago PMI 13:55 USD University of Michigan consumer sentiment index

The Risk Today: EurUsd The gradual grind higher continues for EURUSD; after popping above 1.3046 resistance yesterday the pair had a couple of quick peeks above 1.3100, but choppy and sideways price action is likely to dominate ahead of today’s Eurozone unemployment reading and US GDP this afternoon. We are still playing the bullish break out of a symmetrical triangle pattern on the hourly chart, and based on the projected path of that triangle we are expecting a move to 1.3290 in the coming days. Resistance is expected to remain in play around yesterday’s highs of 1.3106, but beyond there we have a very clear path up to next levels 1.3213 and 1.3254 (14 and 13 May highs respectively). 1-month uptrend support is eyed at 1.2980, then the 100-day moving average 1.2849, followed by 1.2793 (23 Jul low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). GbpUsd Much like EURUSD, GBPUSD has managed to reach new highs at 1.5656; but the progress since yesterday has been modest to say the least, and market participation later on is likely to hinge on the outcome of this afternoon’s US GDP release. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5420 to get long. The way things have gone so far, we may not even get a correction that deep as good support is also anticipated around the 200-day moving average at 1.5541, 1.5525 pivot, then again at 1.5443 (27 Jul low). Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, and beyond there we open up the possibility of re-testing the top of the 8-week uptrend channel (currently at 1.5980) before the psychologically significant 1.6000. UsdJpy Ongoing bearish momentum has quickly managed to negate the 1-week uptrend and accompanying bullish scenarios we discussed earlier in the week, and this morning the pair is looking to threaten the critical 86.25 downside support. Should that support give way then the prospects look grim for anyone still clinging to longs; downtrend channel resistance at 85.60 is the only support anticipated ahead of the November 2009 low of 84.83; and the notable lack of interventionist rhetoric from the BoJ is also likely to cast doubts. As such, we’d actually look to get short on an hourly close through 86.25, and target 85.00 as a first target. Rallies are likely to face resistance back towards the back side of the 1-week uptrend (now seen at 87.30, and beyond there the 8-week downtrend has now crept down to 87.75 with 88.00 also just behind. UsdChf The bears have jumped all over this pair since the break of the 1-week uptrend yesterday morning, and major support at 1.0400 is being mauled to pieces as we speak. We now see a possible bearish flag pattern on the hourly chart, and therefore wait to go short on a confirmed break below 1.0390 with a proposed target of 1.0230. This target is identical to the low seen on the 19 Jan so there is some argument for being a little less ambitious than the flag target would normally suggest, so we propose a 1.0250 take profit on the downside. There are still some potential stumbling blocks to overcome along the way; the first of those being the 25 Jan low 1.0368 and the back side of a former downtrend at 1.0350. Selling interest is expected to materialize around 1.0450 and 1.0560 former supports, followed by significant at 1.0647 (13 Jul & 27 Jul highs and 200-day moving average).

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3213 1.5780 89.50 1.0641 1.3093 1.5720 89.15 1.0620 1.3028 1.5690 88.45 1.0595 1.3046 1.5627 86.29 1.0396 1.2950 1.5525 86.80 1.0460 1.2790 1.5440 86.25 1.0390 1.2730 1.5350 85.30 1.0360 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot