Forex News and Events:

There has been a stark change in the markets' sentiment regarding the USD since last Thursday. The obvious question is: is this shift a complete reversal or just a temporary correction before a continued USD weakness? The markets reaction to the large upside surprise to private sector payroll employment (improvements across all sectors) seems to us slightly misguided. The USD initially sold off but then rallied back as NFP printed at -345k vs. -520k exp (although the official unemployment rate edged disturbingly higher). The stronger data in a critical component of the US recovery story has increased speculation that the Fed will begin unwinding of liquidity measures, through tighter monetary policy, by years end. We are unconvinced that the recovery will be fully entrenched or that inflation levels will become (in that period) so worrying that the Fed would be willing to take this action. However, with Trichet clearly stating that the ECB would be looking to begin draining liquidity soon, markets have now begun to think about a world without central bank super liquidity (anecdotal support materialized and provided yields in the US Treasuries with firm footing, which were pushed higher after the NFP number).

On a side note, over the weekend Chancellor Merkel's party did very well in the European elections and we expect her criticism of major central banks, before German elections in the fall, to increase. In addition, the UK's labour Party faired poorly. However, Prime Minister Gordon Brown and Chancellor Alastair Daring have been able to hold on, ensuring some level of continuity for the near term. The Sterling has been under significant selling pressure as of late and its future depends on domestic political developments, as much as macro trading themes. The GBP corrective setback from 1.6660 is now pressuring the 1.5880 key support. A break will then have traders focused on 1.5519 (38% fib). And as a final note, ECB and European Union are both watching the situation in Latvia closely as the devaluation debate continues. While Sweden should have the largest direct exposure, and EU countries have attempted to differentiate their own economies there is still a significant concern over contagion risk in the region. With the European Parliament elections out of the way (weakened centre-right coalition) Latvia will need to deliver its fiscal austerity measures for the IMF / EU. In the short term it should calm Sweden's nerves (expect continued pressure on the SEK) but unlikely to end speculation surrounding the potential exit strategies from the current peg.

Forex-Chart

Today's Key Issues (time in GMT):

10:00 EUR New manufacturing orders, % m/m (y/y) Apr 0.0 exp, 3.3 (-33.1) prior

15:00 EUR Eurogroup meeting of euro area finance ministers in Luxembourg

16:30 USD Fed Governor Tarullo (FOMC voter) speaks on Financial Regulation in the Wake of the Crisis

17:35 EUR ECB's Stark speaks on monetary policy at the Upper Austrian Industrial Organisation

23:01 GBP RICS housing market survey, price balance May -52.0 exp,-59.9 prior

23:01 GBP BRC retail sales monitor, total sales,May % y/y 6.3 prior

The Risk Today:

EurUsd Broad head and shoulders formation at the top of the move that took us from 1.3795 to 1.4340 completes and finalizes the turnaround in trend; the steep decline highlights the overbought nature of the pair. Our next crucial level is at 1.3795 which would complete the end of May bullish cycle. A break past this level would focus the next crucial 1.3582. On the upside previous supports become resistances with a cap at 1.4210. Expect periodic retracements to the bearish move at levels.

GbpUsd Pound has embarked on a deep correction as the retracement on the broad bearish move started a year ago neared the 50.00% Fib level and bounced off 1.6670. As we near the initial target zone at 1.5795 level with a short term target for 1.5536 – which highlights the steep Sterling losses expected. Pair should remain set for the downside with possibility for retracement to 1.6008.

UsdJpy Dollar gains on the back of risk aversion would see the Yen gain at a higher rate than the dollar. The fact that the pair gain on Friday's dollar gains would suggest more fundamental themes are at play. While we see the pair's momentum waning further gains aren't to be discounted. Crucial level at 97.81 for a definite short with a floor in at 96.74. On the upside 98.69 stands as initial resistance with 98.90 as crucial signal for further gains.

UsdChf The pair is trading inversely to the EURUSD so much of the commentary applies here (inversely of course). We broke strong resistance at 1.0956 which now is initial support with a floor in at previous neckline 1.0751. Further gains will reign in 1.1056 via 1.1000. On the upside we see short/mid – term resistance at 1.1265 as the dollar continues to strengthen.

Resistance and Support:

EURUSDGBPUSDUSDJPYUSDCHF
1.41101.6236100.001.1265
1.40501.613498.901.1056
1.40031.600898.691.1000
1.38231.583098.561.0970
1.37951.579598.071.0950
1.37291.568597.811.0910
1.35821.553696.741.0751
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot