The following has been sent to CMC Markets clients right after today's Bank of England rate announcement.
Sterling has already knived through our projected resistance of $1.5150, making yesterday’s $1.5280 high a less-challenging target, especially amid potentially negative U.S. jobs data ahead (weekly claims and payrolls). GBP likely to demonstrate the usual pattern of tempering current gains going into the U.S. opening bell before rebounding later in New York trading; $1.5350 appears a viable target based on retracement/recoveries of the past 5 sessions.
Shifting onto the U.S. session, President Elect Barack Obama's speech comes one day after the Congressional Budget Office did the inevitable and revised upward its 2009 budget deficit estimate to $1.2 trillion, fuelling the imbalance to 8.0% of GDP from the last $438 billion estimate (3.0% of GDP). The FY2010 estimate was revised to $703 billion from $438 billion.
Commodity currencies took a back seat in Wednesday trade after the higher than expected crude stock builds and news of Israel’s acceptance of the principles of truce in Gaza. As the February crude oil contract fell by more than $7 to below $44 per barrel, the Canadian and Australian dollars followed suit, even against the broadly weaker U.S. dolalr. EUR/CAD and GBP/CAD are making notable advances, exploiting oil’s retreat, which may extend towards $40, according to the daily stochastics. And with the Bank of England (BoE) opting for the smaller option of -50 basis points, GBP/CAD may well accumulates gains towards 1.83 and onto 1.85. EUR/CAD reflects both the euro’s broad recovery and loonie’s broad pullback, setting sight onto the 1.6650 trendline resistance. AUD/USD’s two-day decline tests a two-week trendline support of 0.6950, which is backed by a clearer foundation of 0.6861.8% retracement of the 0.6070-0.7268 rise. Recovery now targets 100-day moving average of 0.7170.
Euro Struggles to Ride GBP’s Climb EUR/USD attempts to cling on GBP/USD’s gains but latest German factory orders and poor Euro zone sentiment figures support the case for a possible 75 bp cut next week from the European Central Bank (ECB), which would bring rates to 1.75% vs. 1.50% for BoE and reduce the differential from 50 bps to 25 bps. Such a scenario could provide renewed short-term selling interest in EUR, but the ECB is wary of excessive currency weakness regardless of falling inflation and would be the first to express itself via pronouncements on monetary policy. EUR/USD drops below 100-day MA, facing interim support at $1.35, followed by $1.3420. The breach of 1.37 resistance follows onto staunch trend line resistance of $1.3830.
JPY yen still has USD to knock around. USD/JPY at 94.50, S&P500 at 945 and VIX at 35 were all limits of the recent bout of risk appetite projected in previous research notes for end of December. The 35 support in the VIX was our most convincing signal representing the 200-day MA, a tech level not breached since September. The 94.50 yen level was the 100-day MA, which was also last breached in September. Such are the manifestations of intermarket analysis dictating risk appetite through currencies and equities. USD/JPY seen extending losses below 91 towards 90.70, but Friday’s nonfarm payroll may provide a case of relief if the unemployment rate remains below 7.0%. A breach above 7.0% and a payroll loss of more than 550,000 is expected to drag the USD towards 89.80s.
