Subtle USD Strength in an Uncertain Market

Uncertainty seems to be the core theme in FX markets, with the USD stuck in limbo. The event of the day, German IFO, printed higher than expecteed, with the business climate reading coming out at 89.5 vs. 86.9 exp. The key event for markets this week will be the FOMC meeting, where markets hope they will be give some level of clarity regarding the timing of further tightening and prospects of the Feds QE program.

[B]News and Events:
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Uncertainty seems to be the core theme in FX markets, with the USD stuck in limbo. With a busy week ahead, markets are taking a wait and see approach to pricing. With Eurozone PMI, US durable goods, UK CBI distributive trades, Swiss KoF and the FOMC announcement on the docket, we would expect the EURUSD to be pushed out of its subtle bearish channel (horizontal support 1.3750). The key event for markets this week will be the FOMC meeting, where markets hope they will be give some level of clarity regarding the timing of further tightening and prospects of the Feds QE program. Fed Funds futures are currently pricing in a high probability of tightening later this year and we expect members to strengthen the language that rates will stay low for an extended period of time, which will be USD negative. In regards to QE, there is little evidence that the Fed will look to expand the current asset purchase program and credit markets (however volatile) and underlying economic data has improved. The outstanding question on the program’s effect on domestic inflation has caused some divergence in voting members comments expressed last week. Overall, the absence of further expansion should be USD positive, as higher yields should support the USD risk premium. The mixed outcome has clouded the USD direction in the near term. The event of the day, German IFO, printed higher than expecteed, with the business climate reading coming out at 89.5 vs. 86.9 exp. We are currently seeing a decline in risk barometers, with AUDUSD falling to 76.60 and EURJPY pushing below 133.00. Commodities are also seeing some selling, as the debate rages on whether the pace of Chinese commodity stockpiling has decreased and spillover in to broader pricing. Traders seem unimpressed by the SNB Thursday�s hawkish FX comments and have been pressuring EURCHF back towards the 1.5000 threshold. We believe the SNB will not tolerate a much stronger CHF as inflation is already unnervingly close to deflationary levels. In the EM space, the HUF continues to make steady gains and should the NBH hold rates at 9.50%, as is widely expected today, EURHUF will be focused on key support at 275.19.

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Today’s Key Issues (time in GMT):[/B]

08:00 EUR Germany: IFO business climate, index Jun 85.0 exp, 84.2 prior
08:00 EUR Germany: IFO current assessment, index Jun 83.1 exp, 82.5 prior
08:00 EUR Germany: IFO business expectations, index Jun 87.0 exp, 85.9 prior
12:00 EUR ECB President Trichet gives a keynote speech at a conference organized by the New Economy Forum
12:00 Hungary: NBH interest rate announcement, % 23-Jun 9.50 exp, 9.50 prior
14:30 Israel: BoI interest rate announcement, % 25-Jun 0.50% exp, 0.50% prior

[B]The Risk Today: [/B]

[B]EurUsd:[/B] Slight bearish channel. Risk of a further correction to 1.3720 seems likely now. Move above 1.4170 will help reinstate bullish theme. Current bearish pennant will have traders watched for breakout opportunities. Intraday expect range bound trading between 1.3970 resistance and 1. 3730 support.

[B]GbpUsd:[/B] Bullish pennant over the last few weeks will have traders watching for a move towards 1.6663. Initial resistance stands at 1.6560 & close above will restate bullish theme. Break of trendline resistance at 1.6560 is needed to complete the pattern and trigger gain above 1.6660. Key support stands at 1.6257 (21 day ma).

[B]UsdJpy:[/B] rally was capped last week by the old 97.10/25 range lows ( daily cloud). last weeks rapid decline to 96.08 then breach of 95.30 trendline support cleared out short term support (however sellers quickly departed). Potential large reverse Head & Shoulders (top 94.00) forming on the weekly.

[B]UsdChf:[/B] SNB is seems to be waiting at EURCHF 1.5000 or perhaps its just traders seeing shadows. Either way for now CHF strength is limited. Initial resistance at 1.0952 with a breakout level at 1.0988. On the downside 1.0750 is floor, with crucial (previous neckline) levels at 1.0650. For now the pair is broadly bullish.

[B]Resistance and Support:

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By[B] Peter Rosenstreich [/B]- ACM Advanced Currency Markets, Geneva, Switzerland