The flurry of rhetoric from policymakers in the past day seems to affirm that conditions conducive to continued USD-selling are likely to persist; with further assurances this morning from US Treasury’s Timothy Geithner, Chinese Finance Minister Zhu, and Canada’s Jim Flaherty. All have echoed the same message that an early exit from stimulus could be severely disadvantageous, and that economies are still at a point where accommodative policies are required to support the early stages of recovery. This comes a day after the BoE’s Inflation report which, like the MPC statement, seemed to present a more balanced review of the economy and left the door open to flexibility on further stimulus. The fierce sell-off in GBPUSD and GBP-crosses was symptomatic of a quick exit from longs built on the presumption that last week’s QE expansion of 25bn would be the last, a view that we did not share with any conviction. However before GBP is condemned to further downside, it’s worth bearing in mind that Mervyn King’s comments did not guarantee the MPC would definitely increase the asset purchase target, and indeed the projections contained within the report seem to suggest the likelihood of a return to growth in Q4 this year with just the current total of GBP200bn and current interest rate expectations. With the fundamental backdrop ensured, it seems that it will be largely technical drivers that will dictate FX moves ahead of the next round of major economic data releases. Most pairs have been lodged in clearly marked ranges, with the exception of gold that has powered to new highs above $1123 and is by far outstripping all other asset classes in benefitting from USD-weakness. We should be wary however that this latest surge means prices have gained over 12% in the last month alone, and commodity markets are notoriously susceptible to so-called blow-out reversals when prices form an exaggerated spike before a crash.


Today's Key Issues (time in GMT):

10:00 EUR Industrial production, % m/m Sep exp: 0.5 prev: 0.9
13:30 USD Initial jobless claims, thous 07-Nov exp: 510 prev: 512
13:30 USD Continuing claims, thous 31-Oct exp: 5700 prev: 574

The Risk Today:

EurUsd The consolidation trade between 1.5046 and 1.5020 highlighted yesterday morning gave some easy intraday pickings and after several moves between the two levels the pressure was too much for the downside sending the pair straight to the support at 1.4953 / 67. In the process the pair has printed a ‘shooting star’ candle on a daily chart. ‘Shooting stars’ are topping candles. Having bounced back up to test the 1.5020 region and subsequently fail, the pair has now formed a 3 day ‘head & shoulders’ formation with a target of 1.4860 where it will also meet support and one of the medium term uptrend channels. The break down of the neckline at 1.4953 is occuring at time of writing so expect any bounce back up to that level or even as high as 1.4970 to attract fresh shorts. 

GbpUsd The hanging man candle noted yesterday, coupled with RSI divergence, followed through nicely with a 2 figure drop over the course of the day and settling down at 1.6540. This now puts the pair firmly back under the 2 year downtrend channel but core shorts may want to see it stay down here for a period of time before increasing their positions. Looking at the daily chart, the most obvious place cable is looking to go is 1.6272 with 1.6484 likely to provide a bounce on the way down. A bounce from that level back into the 1.6620 region would look like a pretty good short entry point for the counter trend traders while the momentum players will likely wait for a break below 1.6484. 

UsdJpy Near perfect rangebound action on USD JPY between 89.71 and 90.02 in the last 24 hours and despite all trends pointing lower the selling just isn’t coming. The lack of heavy selling is probably due to such major support just below at 89.17 and any short sellers would have to exit their trades with impeccable timing to avoid getting burned. 90.20 still looks like a decent entry to get short on an intraday basis, but be aware over the coming days that the pair may well be forming an ‘inverse head and shoulders’. More about that as and when necessary. 

UsdChf Our long entry level at 1.0037 was well supported throughout yesterday morning and the market gave us several opportunities to get involved hitting lows of 1.00371, 1.00354 and 1.00368 over a 2 hour period before launching higher towards the resistance at 1.0110 before the European close of business. Today we have the exact same picture as EUR USD with an inverse head and shoulders that needs to break 1.0110 to target 1.0183. Coincidentally the target takes us right to the major short term resistance which lies at 1.0186 but be aware that we may make another shoulder first, back down at 1.0062 where we would expect to see some solid bids enter the market. 

Resistance and Support

1.5100 1.7400 93.50 1.0290
1.5063 1.7041 92.50 1.0200
1.5046 1.6900 90.75 1.0132
1.4955 1.6575 89.80 1.0105
1.4910 1.6400 89.20 1.0037
1.4810 1.6260 88.85 1.0000
1.4626 1.6200 88.00 0.9890
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot