Market News & Insights
22 July 2014

USD Poised to Breakout

EUR/USD 1.3501
GBP/USD 1.7067
GBP/EUR 1.2620 (0.7924)
EUR/CHF 1.2150
GBP/CHF 1.5363
GBP/AUD 1.8181

The lack of major economic data through yesterday’s trading session left market focus on geopolitical tensions and other news flow. With that, equity markets struggled to find any traction through both the European and US session, both markets major indices facing declines. Not surprisingly it was Russian markets that bore the brunt of the sell off as the prospect of further sanctions threatens the country with recession as stocks have declines 10% in 10 days. Major currencies have been in consolidation mode through the opening hours of the week, with EURGBP, GBPUSD and EURUSD all failing to trade outside a 25 pip range through yesterday.

There was still a bias towards safe haven currencies as demand for safe assets drove US yields higher helping to support the greenback. In the overnight session we saw some risk appetite return to markets as Japan returned from a holiday, over all Asian bourses were in the green. The AUD rallied overnight after the RBA Governor Glenn Stevens failed to reiterate concerns about the currency being over valued during a speech, which allowed the Aussie to claw back the ground it lost in Monday’s session.

GBPUSD probably best illustrates the plight of the pound and with a week of key event risk GBP sits tightly just above 1.7050 and just above a number of key support lines that have been a part of GBP’s bull run for the last year. The bad news for the pound is it is now facing its fifth consecutive day of declines which is the worst run for GBPUSD in over three months. This will reflect some amount of profit taking from the rally higher but also signifies that the next move, will most likely be led by this week’s data, with either see the beginning of a fresh bear trend back towards 1.6800, or see a fresh challenge above 1.72000.

Our regular readers will know that the pounds run has been due to a outperforming UK economy driving interest rate expectations higher. This means tomorrows MPC minutes will carry some key weight, particularly if there is any indication as to the timings of a possible rate increase. Any suggestion the committee favours a hike before year end will likely see GBP start a fresh rally, while anything less is likely to be a disappointment to markets. We will have to wait for tomorrow’s release of the minutes to confirm.

A quiet economic calendar through the European session this morning will likely result in plenty of attention on the release of June’s US CPI data. The inflation benchmark is currently at 2.1% year on year, the highest reading since 2012 and is expected to remain unchanged in this afternoon’s release. US price growth readings have tended to surprise to the upside since the beginning of the year which leaves the door open for an upside surprise in this print. Rising inflationary pressures will likely see the gap between QE finishing and Rates rising narrow, which will favour US Treasury Yields and the USD.

The EUR has remained under pressure and has seen continued selling already this morning with EURUSD testing back below 1.3500. We have plenty of stop loss orders at 1.3490 and this seems to be a favoured position in the market so we may well see a bounce from here once again, however every test lower weakens the defences and opens the door for a larger EURUSD move lower. The Eurozone has come under pressure from tensions in the Ukraine, and Eurozone peripheral debt has seen selling, not surprisingly given the complacency in their risk premiums.