EUR/GBP – Time for a Breakout

EUR/GBP – Time for a Breakout

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EUR/GBP – Time for a Breakout

Tomorrow is Super Thursday in the U.K. because we have the Bank of England monetary policy announcement, Quarterly Inflation Report and a speech from Mark Carney on tap. Independently each of these event risks could trigger big moves in sterling but together, we can be assured of a breakout in EUR/GBP. For the past week, EUR/GBP has traded in a tight 70-pip range. The downside has been limited by the 50-day SMA and the upside capped by the March high. While there may be a head and shoulders forming, a break below 0.7850 would be needed for the pattern to continue emerging. However if EUR/GBP breaks above 0.7950, the next stop should 80 cents.

Fundamentally, forecasting the outcome of tomorrow’s events is difficult to forecast because the Bank of England has to balance weaker growth with hotter inflation and Brexit risks. They’ll want to stay neutral about the pros/cons of Leave/Remain but at the same time realistic about its risks. Recent U.K. economic reports show manufacturing and service sector activity slowing, retail sales falling and wage growth decelerating. Based on these measures alone, the BoE’s February growth forecasts look too optimistic. However inflation is on the rise with oil prices up more than 45% since the February inflation report and sterling trading lower. The latest consumer and producer price reports won’t be released until after the central bank meeting but rising inflation expectations along with price pressures will prevent the central bank from talking about easing.

Big Breakout in GBP/USD

Big Breakout in GBP/USD

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Big Breakout in GBP/USD

For the first time in more than a month GBP/USD broke above 1.45 and while it did not close above that rate, the currency pair has broken to the upside and now a move to 1.46 seems likely. Although part of today’s move can be attributed to the improvement in the CBI industrial trends survey, the main reason for the currency’s strength and its complete disregard for recent data disappointments is Brexit. Leaving the European Union poses significant risks for the country and the region as whole but with traders spending the better part of the year taking on Brexit bets, what we’ve seen in recent weeks is widespread short covering. With less than 2 months to go before the E.U. referendum, positioning is playing a very big role in the performance of the pound. Recent U.K. data has been terrible but instead of falling, sterling rallied as investors reduced their short positions. While it may seem counterintuitive they are interpreting every negative headline as a reason for voters to favor remaining in the European Union. That includes President Obama’s latest warning that it would take the U.K. a decade to negotiate a free trade deal with the U.S.

Technically, the latest move in GBP/USD takes the pair firmly above the 100-day SMA for the first time since September. Today’s high of 1.4520 marks near term resistance but 1.4640 and 1.4670 is the primary area of resistance. Support on the other hand is below the 100-day SMA at 1.4400.

AUD/USD – Is the Breakout For Real?

AUD/USD – Is the Breakout For Real?

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The Aussie took out the 7700 in the wake of better than forecast employment data, but as we noted earlier,”Although the headline numbers looked upbeat, the underlying data was far less bullish than it would appear. All of the gains were actually in part time jobs and full time employment actually shed -8.8K positions. Furthermore the trend growth data which is designed to smooth the noisy month to month results is showing a deceleration in growth to 2.2% in March from 2.6% in December of last year. Lastly the the trend monthly hours worked in all jobs series decreased by 1.8 million hours (0.11%) to 1,643.7 million hours.

None of these data points were unabashedly bullish and Aussie actually sold of a bit in the aftermath of the release, but the unit found a very strong bid in European trade climbing more than 70 points in a few hours. The net takeaway from today’s AU employment report is that despite the deceleration in job growth trend the RBA will remain stationary for the foreseeable future protecting Aussie’s 2% yield and which will in turn attract more carry trade flows into the pair.”

Tonight the market could get a confirmation of stabilizing forces in Asia when China reports its GDP and IP figures. If the numbers are generally in line, the Aussie could get a further boost and move towards the 7750 level indicating that the breakout is indeed for real.

Forex Trading Tip – #1 Driver of FX Flows this Week

forex blog Forex News Kathy Lien

Between an emergency Fed meeting, the Bank of England and Bank of Canada monetary policy announcements, US retail sales, Chinese GDP, Australian employment, UK consumer prices and a host of other tier 1 event risks, there are no shortages of events that could drive big moves in currencies.

However, the #1 driver of FX flows this week will be risk appetite. That could be driven by the swings in commodity prices, the volatility in equities, Chinese and/or US data. At the end of this week on Sunday there’s a production freeze meeting in Doha and we are already beginning to see headlines about some producers refusing to cut production. One of the main reasons why commodity prices are performing so well this morning is because crude oil is above $40 a barrel.

Chinese data will also be important. Consumer prices were released last night and the stronger report propelled AUD/USD above 76 cents. Tuesday evening, Wednesday morning local time Chinese trade numbers are scheduled for release and on Thursday evening / Friday morning, Chinese industrial production, retail sales and Q1 GDP numbers are due. We are beginning to see signs of stabilization in the world’s 2nd largest economy but according to China Premier Li, the downside pressure on the economy remains.

And of course there’s Wednesday’s U.S. retail sales report – the market detests dollars but a blowout report could help to turn things around.

Keep an eye on the VIX:

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EUR/USD – Its Time for a Breakout

EUR/USD – Its Time for a Breakout

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EUR/USD – Its Time for a Breakout

The ECB is widely expected to ease monetary policy this week yet the euro refuses to fall, which leads many investors to wonder if easing has been completely priced in. The market expects the central bank to lower the deposit rate (a decision they passed on in December), but there’s very little consensus on the actions they could take. The ECB experienced the consequences of under delivering last year and they will want to avoid a decision that could squeeze EUR/USD higher, undermining the effects of the stimulus. Besides lowering the deposit rate, the ECB could increase the amount of assets purchased per month, extend the end date of bond buying and possibly even introduce new TLTROs. Since analysts are predicting an increase to the QE program of anywhere from zero to 20 billion euros, there’s plenty of room for surprise. In addition Mario Draghi could talk about doing more in the coming year that could also affect how the euro trades. Therefore while we agree that investors have priced in a 10bp deposit rate cut, there’s so much more the ECB could to do that would weaken the euro.

Technically, EUR/USD is trapped between 2 moving averages and Fibonacci levels. Above we have the 200-day SMA near 1.1050 and the 50% Fibonacci retracement of the March 2015 and August 2015 rally near 1.11. Below there’s the 61.8% Fib of the same move right at today’s low and then the 100-day SMA. The ECB rate decision certainly has the significance to break the pair out of its range and given the fundamental backdrop we are still looking for a downside break.

NZD/USD – Double Top or Breakout?

NZD/USD – Double Top or Breakout?

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NZD/USD -- Double Top or Breakout?

NZD/USD is at a crossroads today with the latest rally taking the currency pair within 20 pips of its October high. This level is significant not only because the currency pair peaked at that point in October but also because it coincides with the 50% Fibonacci retracement of the 2009 to 2011 rally. While today’s move has taken NZD/USD above its 200-day SMA for the first time since August 2014, it is absolutely essentially that we see the currency pair end a day at least 50 pips above the October high of 0.6897. If that occurs then it will be an easy move to 70 cents followed by a run to 0.7340 if the former level is broken.

With most of the market in holiday mode, today’s move was driven by a recovery in commodity prices and reports that China could increase its budget deficit in the coming year which would mean more stimulus and more support for their economy. We are looking for the New Zealand dollar to outperform in the first few weeks of the New Year which means we are looking for fresh 5 month highs. However the low liquidity break of the 200-day SMA still needs to be proven real

EUR/USD – Is This Breakout for Real?

EUR/USD – Is This Breakout for Real?

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The EUR/USD rose more than 3% today in one of the biggest short squeezes in years as Mario Draghi under delivered and the pair which was grossly oversold popped more than 300 points higher. There is no doubt that today’s carnage caused a lot of pain to late EUR/USD shorts but the key question is whether the pair has set a long term bottom.

We don’t think so. The underlying dynamics that send the euro plunging remain in place. The ECB will continue to exert its downward pressure on short term rates as it maintains the aggressive QE program in the face of disinlaftionary pressure that still persist in the region.

Meanwhile the Fed despite the hick ups in US economic data will likely hike rate in December and the spread between USTs and Bunds is unlikely to narrow much providing a natural boost to the dollar. Only a delay in the Fed hike and a decline in the benchmark 10 year rates towards the 2% mark could upend the dollar trade and push the EUR/USD pair higher. Meanwhile the 1.1000-1.1100 level looks to cap the move for now.

Is AUD/JPY Ready for a Breakout?

Is AUD/JPY Ready for a Breakout?

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Over the past week, Aussie has been the one currency that has stood its ground against the buck. There is are several good reasons for this. Much to the surprise of the market the Australian economy is not collapsing despite the slowdown of growth in China. In fact the latest jobs data from Down Under showed a massive increase.

All of this has led the RBA to remain decidedly neutral and the central bank is not likely to lower rates this year or for the foreseeable near term horizon. That fact should help to preserve the Aussie yield especially against the yen which continues to weaken as the market becomes more and more convinced that the Fed will normalize rates in December.

Technically with the pair making higher lows and price curled around the key 85.50 level the pair looks to be on the cusp of breakout which can propel it to eventually close the three month old gap around the 90.00 figure.

EUR/CAD on the Point of BreakOut

EUR/CAD on the Point of BreakOut

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Its central bank time as the next two days will be dominated by BOC and ECB. In Canada the election of the left leaning Justin Trudeau put a special wrinkle in BOC’s plans as his proposal to increase deficit financing in likely to keep Governor Polosz contained and therefore limit any additional stimulus that may come from the central bank.

In Europe on the other hand, the talk has been of more rather than less QE as policy makers look to jumpstart the moribund economy and there is small chance that Mario Draghi may signal that the ECB could expand its program over the next few quarters as policymakers try to guide the euro lower. There is a chance therefore for EUR/CAD could break down from its 1.4600 -- 1.4800 channel and start moving toward the 1.4200 mark.

AUD/USD – Counting Down to Breakout

AUD/USD – Counting Down to Breakout

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The Australian dollar is prime for a breakout and we’ve got the perfect catalyst tonight with the Reserve Bank of Australia’s monetary policy announcement. The Australian dollar traded lower on Monday, signaling that investors are positioning for a rate cut and even though 18 out of the 29 economists surveyed by Bloomberg also expect the RBA to ease, a rate cut is not a done deal. There has been just as much improvement as deterioration in Australia’s economy. For example, while the labor market weakened, private capital expenditures plunged and manufacturing activity in the month February contracted at its fastest pace since July 2013. We feel that there hasn’t been enough broad based deterioration to warrant back-to-back easing. China’s decision to lower interest rates in reaction to weaker economic reports makes the RBA’s decision even more complicated.

We are short Australian dollars so a rate cut would be advantageous to our Big Trade. There’s still a reasonable chance of easing by the central bank and even if they choose to keep rates unchanged, we expect the RBA to maintain a dovish bias, leaving another round of easing in 2015 on the table. If AUD/USD breaks below 0.7740 on the rate decision, there is no major support until 0.7625. If it spikes higher, a move above 0.7915 would open the door for a run to 0.80.

EUR/USD – Time for a Breakout

EUR/USD – Time for a Breakout

Chart Of The Day

EUR/USD – Time for a Breakout

Between Fed Chair Janet Yellen’s testimony on Capitol Hill, ECB President Mario Draghi’s testimony on monetary policy and the Eurogroup’s decision on Greece’s reform plan, tomorrow will be a big day for the EUR/USD. From both a technical and fundamental perspective the currency pair has been itching for a breakout and waiting for a catalyst to set it on a new direction. We know that the EUR/USD is deeply oversold and short positions are stretched but with the ECB increasing stimulus and the Fed looking to raise interest rates, there is a reason why the EUR/USD is trading at its current levels. How the EUR/USD trades on Tuesday and the days ahead will be determined by whether the gap between Eurozone and U.S. policy widens or narrows. If Yellen talks about tightening and Draghi emphasizes the need for easy monetary policy, the currency pair will break to the downside but if Yellen sounds less eager to raise rates and Draghi seems more comfortable with regional risks now that Greece has received an extension, a short squeeze could finally drive EUR/USD higher.

Taking look at the daily chart, the consolidative triangle pattern is clear. If the EUR/USD breaks the top of the triangle, the next stop should be 1.1645, a former support turned resistance level. If it breaks the downside and takes out 1.1275, the next area of support is at the 11 year low of 1.11.