UK Data Of Critical Importance To GBP This Week

News and Events:

Without a doubt, the most important currency to be watching this week will be sterling. The big story in the UK is the persistently high level of inflation which has been well in excess of the MPC’s 2.0% target and indeed the 3.0% threshold set by the Treasury throughout 2010. For much of the year, this surge has been disregarded or overshadowed by the BoE’s unwavering focus on vulnerable growth and an inflation forecast that predicts a rapid decline in inflation at some point. But this story has really started to get interesting since MPC member Sentence began dissenting at the BoE meetings in favour of a rate hike, and more commentators have started to speculate on whether the BoE’s inflation forecast may be wrong and a hike is actually on the cards a lot sooner than we’ve been led to believe.

For these reasons, on Tuesday all eyes should be on the June reading of UK CPI; where consensus is looking for the year-on-year figure to pare back to 3.1% from last month’s 3.2% print. But expect a strong bout of GBP demand if the reading should deviate higher. On Wednesday, we get the release of the BoE minutes from the most recent meeting. Recall there were no changes to monetary policy announced this month but if it’s revealed that any other members have joined Sentence in voting for a hike then we expect GBP to rally pretty sharply. In fact, we feel that such a scenario would be a game changer for the GBP and would consequently be looking for another test of the 1.6000 barrier in the near term and then perhaps another trip to the 2010 highs around 1.6450.

Given the prevailing uncertainty within the Eurozone, we actually like trading GBP strength through EURGBP – thus stripping out a lot of the USD-volatility that’s made trading so tricky for retail investors of late whilst also expressing our bias for softness in EURUSD going forward. Looking at the technicals, we believe that once we’re below 0.8200 ion EURGBP there’s a clear route to the 29 Jun lows around 0.8070.

Today Key Issues:

• 09:00 EUR CPI (Jul); exp: -0.4% MoM, 1.7% YoY, prev: 0.0%, 1.4%
• 12:30 USD Empire Manfacturing (Aug); exp: 8.30, prev: 5.08

The Risk Today:

EurUsd EURUSD’s losses look far from over but the blood-loss has been slowed temporarily by support from the 21 Jul low 1.2732 and trendline support (the 2-month uptrend channel) coming in around 1.2715. We are now trading comfortably above 1.2800 ahead of today’s Eurozone CPI, but plenty of selling interest from residual longs should cap the upside; 1.2875 is the upper edge of a very short-term downtrend channel, and that is followed by further resistance at 1.2930 (12 Aug high), and 1.2990 (23.6% fibonacci retracement of 1.1876 – 1.3333). The resilience of that 2-month uptrend is critical to EURUSD’s fortunes, should that 1.2715 level give way then stops are likely to be clustered behind. Next targets on the downside come in at 1.2683 (14 Jul low), 1.2605 (50% fibonacci level) and 1.2522 (13 Jul low).

GbpUsd After bouncing off bids just ahead of the 1.5555 support level (50% fibonacci retracement of 1.6878 – 1.4229), GBPUSD has managed to claw back some of its losses; but the 10-day downtrend remains in force and the collapse of the 2-month uptrend last week also means the bulls will have a tough time overcoming the major resistance levels stacked above us. First resistance on the topside is seen around 1.5695 (top of 10-day downtrend channel), 1.5715 (12 Aug high), and then a massively significant resistance at 1.5800 comes into play (where psychological resistance and the back side of the former 2-month uptrend intersect). This is a big week for UK economic releases, with July CPI due tomorrow and BoE minutes on Wednesday, so if the bulls do find enough momentum to break higher then next levels are eyed at 1.5820 (11 Aug relief rally peak), 1.5909 (10 Aug high), and 1.6000. On a resumption of the downtrend, watch for buyers once again around 1.5555, 1.5503 (200-day moving average) and 1.5440 (27 Jul low).

UsdJpy Ongoing intervention chatter and this morning’s weaker Japanese GDP has allowed the USDJPY recovery to continue off last Wednesday’s 84.73 lows. We do still remain of the view that this relief rally is a false friend, and that the pair is going to be under persistent selling pressure until the BoJ/MoF actually engage in physical rather than merely verbal intervention. We therefore favour a short bias but with very tight stops to limit losses should JPY-intervention materialize. Strong resistance at 86.50 (5 Aug high) has held twice now and is likely to be a tough level to break; but even if it is defeated eventually, further rallies will be weighed by supply back towards 86.89 (2 Aug high) and 88.00. On the downside, the sticky patch between 84.73-85.00 is the only support area defined before 80.00 and 79.75 (historically significant 1995 low).

UsdChf At the end of last week we pointed to a possible double top formation on the hourly chart – and after a choppy Friday session, we finally got the break below the 1.0460 neckline to activate the pattern. We are therefore short and aiming for a target below of 1.0300, but given the rather directionless range USDCHF has been marking out over the past few weeks, we do remain alert that such a target lies below the significant support and range floor of 1.0332 (6 Aug low). As such we think it prudent to remain willing to take profit early should the range floor prove to be stubborn; however we also acknowledge that a break below there would open up even deeper moves to 1.0229 (19 Jan low) and 1.0131 (11 Jan low). If we bounce higher from here then first resistance is eyed at 1.0550 (Friday’s high), and the range ceiling is still, in our view, defined by the 1.0640-60 zone highlighted (27 Jul high and 200-day moving average). Should bullish momentum have the force to break through there then next levels are anticipated at 1.0700 (2 Jul high), 1.0790 (1 Jul high) and 1.0884 (100-day moving average).