Greece Auction & US Earning Support Risk Sentiment

News and Events:

Yesterday, the Euro was able to shrug-off Moody's downgrade of Portugal with the buttress of a well-received Greek debt auction - the positive move was even further resistant to yesterday's positive run in US equity earnings. As a result, EURUSD climbed quickly and was able to break the 1.2700 threshold. Nevertheless, we are not convinced that this rally has any real legs, as liquidity has been poor and leveraged buyers seem to be the core participants driving the EURUSD higher. We suspect the thaw in investor concern will not be as quick or smooth as many talking-heads posit. We do anticipate a sudden reversal in risk appetite but suspect the catalyst will likely be an inconsequential figure such as the underperformance of a bank's earnings or some other, otherwise minor event.

In Asia, regional indexes grabbed onto the positive sentiment and charged higher with the Nikkei up 2.71%, aided by Intel's earnings and Singapore's strong GDP growth. The BoJ's two-day policy meeting began today with analysts universally expecting the central bank to hold rates steady. We are still interested to see if the BoJ will release details pertaining to its stated desire to see bolstered lending from banks to the broader economy. The Yen continues to be influenced by the finicky nature of global risk appetite - yet should rating agencies shift their focus onto Japanese fiscal imbalances, we could see JPY strength quickly unwind. It's our core belief that the sovereign rate crisis radar will eventually target Japan in the mid-term. Mid-to-long term, we are looking for opportunities to the sell the JPY.

In the United Kingdom, the BoE's MPC Sentance continues to rattle his inflationary saber. Today in an interview with the Reading Post, he stressed and affirmed that 'a gradual withdrawal of some of the stimulus' is necessary for future UK economic health. Market participants are re-evaluating whether or not there is some merit to the lone dissenter's arguments as English CPI came in higher-than-expected at 3.2%.

Today's key events are US retail sales and the release of the FOMC minutes. For retail sales, we suspect that the data will disappoint to the downside as fiscal stimulus wears thin and US labor markets fail to convincingly recover in the right places. The minutes should contain some fresh Fed forecasts for the US/global economy. Given the adjustment in recent statements, we believe that the Fed will lower 2010 growth expectations and give recognition to the elevated and resistant unemployment rate. Both events would be significantly negative for risk-correlated trades - something which just could be the EURUSD catalyst we're looking for (and if not we always have China's data tomorrow, including CPI).

Today Key Issues:

• 00:00 JPY BoJ Policy Board begins meeting (to July 15).
• 00:00 Basel Committee to discuss global bank capital rules.
• 00:00 France: Bank holiday
• 08:30 GBP Jun claimant count, -20k exp; prior-30.9k.
• 08:30 GBP May avge weekly earnings, +3.0% exp; prior +4.2%.
• 08:30 GBP May ILO unemployment, 7.9% exp; prior 7.9%.
• 09:00 EUR May ind production,
• 09:00 EUR Jun HICP, unch m/m,
• 09:00 EUR Jun ex-F/E, unch m/m,
• 12:30 USD Retail sales/ex-autos -0.1% exp; -1.1% prior
• 14:00 USD Business inventories, % m/m 0.2% exp; 0.4% prior
• 18:00 USD FOMC June 22-23 meeting minutes.

The Risk Today:

EurUsd Yesterday's better than expected Greek debt sale and ensuing risk rally was the kiss of death for our short EURUSD positions, and after ripping through our stop just above the Monday night highs of 1.2615, the pair then went on to take out the week's high of 1.2650 and then to a peak of 1.2739. This price action now conclusively negates the potential head and shoulders pattern on the hourly chart that we discussed yesterday, and instead lays the foundation for a possible bullish flag pattern in the very short-term. Should this new pattern be confirmed by a break above 1.2735, we can expect an upside target in the region of 1.2950. We are however wary that some residual selling pressure may lurk around 1.2750 and these July markets can be notoriously rangey, so ideally we'd like to see a breakout hold above 1.2750 to bolster our conviction. Once 1.2750 is conclusively overcome, the skies above are very clear for a move higher, with very little resistance before 1.3000 (perhaps the only anticipated level being the 100-day moving average 1.2930). Until that break-out however, the bias seems skewed to a fresh visit to the downside; next supports seen around 1.2690, 1.2600 and 1.2522.

GbpUsd After initial joy that GBPUSD was squeezing back up towards its 1.5080 break-out level yesterday morning (thereby giving the latecomers a second chance to get in on the short trade), the higher than expected UK CPI soon turned that joy to pain by ramping the pair up past the 1.5230 resistance, even tickling a high of 1.5259. Thus far, the brief nudges at the former 1-month uptrend have failed to break above there, but should the sellers eventually step aside, next resistance is not expected until 1.5390 (30 Apr high) and 1.5525. Next support is eyed at today's European low 1.5190, 1.5080 former neckline, then the 12 Jul low 1.4949.

UsdJpy We're still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since Monday morning's promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering between 88.00 -89.00 for much of the last few sessions. As we foresaw on Monday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.20, so we may end up having to settle for a slightly lower take-profit level should this latest attempt at the highs fail to overcome considerable resistance around 89.00-10. Should the move have the momentum to burst through the 1-month downtrend, next resistance beyond lies at 89.50 (28-29 Jun high), 90.50 (50-day moving average), and 90.75 (25 Jun highs and 200-day moving average). Nearest supports expected at 88.00 then 86.97.

UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this week the 1-/2-week downtrend finally broke to the topside with a surge up to 1.0676. Thus far, the broad USD sell-off has failed to push USDCHF back within that downtrend channel (trendline support now 1.0520), so we retain a cautiously bullish stance. Buying on dips towards 1.0550 now looks to be the smartest choice this week, targeting a revisit of 1.0700 levels, with resistance ahead at 1.0650 (yesterday's high) and once again at the 1.0676 high. Down below, support lies at 1.0628 (200-day moving average), 1.0515-20 (13 Jul low and trendline support), then 1.0480 (8-9 Jul lows).