Bank Of England Likely To Remain On Hold, But GBP Remains Heavy

Daily Forex Fundamentals | Written by AC-Markets | Jan 07 10 10:32 GMT |

News and Events: Japan's Kan held the first press conference this morning in his new role as Finance Minister; and FX markets were treated to some unexpected JPY commentary that will likely underline the case for further currency weakness in 2010. While it is nothing new that officials from both the BoJ and MoF have been uncomfortable with JPY strength in recent months; the near 10% rally in USDJPY from November's 84.83 lows had certainly pushed the issue of currency intervention to the sidelines for most traders. Nevertheless, Kan stressed that he would like to see further weakness materialize from here, and went on to add that most Japanese firms favoured a USDJPY level around 95.00. He also outlined the case that a review of the budget would be appropriate - raising the possibility that JGB issuance could be increased. The current draft of the government's budget already has JGB issuance tipping just over the Y44trn ceiling that it imposed on itself; and any further increase would dampen further the market's sentiment towards JPY. As such, our bias remains for short JPY positions, but given the current levels of USDJPY just below 93.00-20 resistance, we await any dip for an opportunity to buy. Today's Bank of England meeting is not expected to produce fireworks in the FX markets; consensus forecasts are looking for no change in either interest rates, or the asset purchase target - but it remains an ongoing issue as to whether the UK economy can sustain its recovery without QE stimulus and manage to emerge from recession confidently in 2010. For now, the GBP remains subdued by concerns about sovereign credit ratings, and just yesterday, the leader of the government opposition leveled harsh criticism at Gordon Brown during Prime Minister's Questions over his credibility in managing the budget deficit. Even Bank of England Governor Mervyn King has inadvertently been dragged into the political slanging match after his earlier comments on the government's need for fiscal restraint have been widely touted as ammunition for the Conservative party against the present government's handling of the recession. With an election imminent (popular opinion looking for 6 May as the likely date for a poll), the battle lines are already being drawn between the two major political parties, and much will hinge on which side can credibly nurture the UK's growth, but simultaneously go about reducing the budget deficit in the ambitious fashion that ratings agencies will want to see. GBPUSD has already broken significant support levels in previous days, and 1.6050-70 now looks like an area of considerable resistance for any rallies. If we see a nasty surprise from today's BoE meeting (in particular the suggestion of more QE above the current 200bn target), we could very quickly see a revisit of 1.5833 lows. Today Key Issues: 10:00 EUR EU Retail Sales exp: 0.0% M/M -1.9% Y/Y, prev: 0.0% M/M -1.9% Y/Y 10:00 EUR EU Consumer confidence exp: -16, prev: -17 12:00 GBP UK MPC Interest rate announcement exp: 0.5% prev: 0.5% 13:30 USD US Initial Claims exp: 440k prev: 432k 13:30 USD US Continuing Claims exp: 4975k prev: 4981k The Risk Today: EurUsd Slightly elevated range today (1.4348-1.4447) after yesterday's FOMC, but still comfortably within the ranges. Once again we are left eyeing topside resistance ahead of 1.4500, and beyond there the major hurdles at 1.4600 and 1.4685. If we look on the daily chart, there is a flag formation being carved out with downside support currently coming in around 1.4280, and if breached we can expect a continuation of the downtrend that has been in play since 4th Dec (break of the 12-month uptrend). It may be a difficult move lower however with support lying in wait at 1.4248 (200 day moving average), and range lows at 1.4210. GbpUsd Previous support at 1.6050 now turns into decent resistance with plenty of selling interest lined up between 1.6050-70. We are still looking for a revisit of 1.5833 (Dec 30 lows) after the break of 1.6000 earlier in the week, but for now there is some retail interest providing near-term support around 1.5900 levels. If we re-enter the range, the 200-day moving average at 1.6106 forms first area of good supply, and beyond there expect prior resistance levels to still be in play: 1.6248 (Dec 18 highs), followed by 1.6323 (100 day moving average), and above there the 1.6400 psychological barrier. UsdJpy USDJPY has been well bid over the past few sessions, but it still looks like we will remain range bound between 93.22 (22 Dec high) and the 91.10 lows. A break below 91.10 would indicate a resumption of the larger downtrend that has been in play since mid 2007, but this seems like the less likely scenario in our view. Look for bids ahead of 91.10, and plenty of offers around 93.00-20 zone to contain the pair; a daily close above the 93 handle would suggest a further move higher. UsdChf Range-trading prevails in USDCHF between 1.0280 and 1.0425, but the break above the 100-day moving average (1.0301 currently) does seem to favour further USD strength from here. Next levels to watch outside the range are 1.0508 key high and beyond there the 1.0700 major resistance (38.2% correction of the move from 1.1970 down to 0.9918). Near term support stands at 1.0320 ahead of 1.0220. EURUSD GBPUSD USDJPY USDCHF 1.4580 1.6400 95.00 1.0700 1.4500 1.6335 93.35 1.0625 1.4484 1.6236 93.20 1.0425 1.4345 1.5925 92.95 1.0330 1.4232 1.5900 91.10 1.0300 1.4210 1.5833 90.00 1.0220 1.4100 1.5710 89.10 1.0175 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.