Waiting On The BoE And ECB

News and Events:

Yesterday, FX traders spent much of the day waiting for news from Greece and today looks to be much the same. But while we wait, the general mood is risk-on. The equities continues to edge higher and US bond yields have reacted with a bearish run to the short term range highs. It's clear by EURUSD price action that traders are scared of going short ahead of any Greek headline or today's ECB rate decision. News flow helped risk firm and sent the EURUSD to new yearly highs at 1.3313. The uptick in yield and decreases risk aversion has sent USDJPY to 77.22. China January CPI unexpectedly printed higher at 4.5% vs. 4% exp. However, the rise was mostly attributed to a one off as large jump in food prices due to Chinese holiday was the primary culprit, unlikely to affect monetary policy. Yesterday, Dow Jones reported that party leaders had received the Troikas demands and that a noon deadline was set. However, as with all lines that European policy maker have drawn, this one too proved to be flexible. Today, headlines from Greece started in Asian session with Greek PM stating that political leaders have agreed on all point except one (we suspect pension reform) and the vote could come this Sunday. In addition the headlines state that Greece leaders were confident that the Eurogroup would approve the agreement. Greek conservative leaders Samaras stated that he is still against further minimum wage reduction, pension cuts and 15,000 civil service lay-offs., which in his mind would clearly put Greece deeper into recession. So we remain skeptical how close parties are, yet the market remains oddly optimistic (although we are seeing less positioned building and more squaring shorts). Perhaps it's the fact that there are reports that the ECB is also close to agreeing on terms for participation. The WSJ reported that, the ECB is now willing to exchange Greek bonds with the EFSF, but still remain against taking any haircut on the exchange.

As we wait for news from Greece was have the BoE and ECB rate decision to keep us busy (see Central Bank Preview). First up will be the BoE which is widely expected to a £50bn expansion of asset purchases, with Bank Rate held steady at 0.50%. This additional QE would put the total asset purchases to £325bn. We suspect that the BoE will indicate that purchases will be entirely of vanilla gilts. As for the ECB we suspect a less action packed event. The ECB is widely expected to hold rates at 1.0% as inflation remains stubbornly high. Trader will be watching the Draghi press conference for any indications of the ECBs strategy in a debt swap. The recent headlines suggest that the ECB is willing to engage in a debt swap with EFSF which would immediate assist the €15bn financing gap.

Today Key Issues:

• 00:00 Emergency Euro Group meeting
• 09:25 USD Obama meets Monti
• 09:30 GBP Industrial Production Prior -0.6 MOM -3.1 YOY Exp 0.2 MOM -3.1 YOY
• 09:30 GBP Manufacturing Production Prior -0.2 MOM -0.6 YOY Exp 0.2 MOM 0.3 YOY
• 09:30 GBP Trade balance Prior -£8644 Exp -£8600
• 12:00 GBP MPC Decision Prior 0.5% Exp 0.5%
• 12:00 GBP QE Decision Prior £275 Exp £325
• 12:45 EUR ECB Decision Prior 1.0% Exp 1.0%
• 13:30 EUR ECB Press Conference
• 13:30 USD Initial claims Prior 367K Exp 370K
• 13:30 CAD New Housing price index Prior 0.3 MOM 2.5 YOY Exp 0.2 MOM 2.5 YOY
• 15:00 USD Wholesale inventories Prior 0.1 Exp 0.4

The Risk Today:

EurUsd The bullish momentum continues to make make short work of all resistance in its way. Break of 1.3230 and 1.3289 resistances exposes further bullish extension. On the topside, resistance stands at 1.3313 (intraday high), 1.3334 (100d MA), 1.3386 (12th Dec high 11). Initial support stands at 1.3221 (intraday low), 1.3089 (7th Feb low), 1.2931 (25th Jan low), 1.2839 (19th Jan Low), 1.2588 (24th Aug low) then a lot of noise till 1.2154 (29th June low).

GbpUsd The feel good attitude has carried over to the cable. The pair made a clean break of 1.5885 and looks to challenge resistance at 1.5932/35 (15th Nov high 11& 200d MA) then not much till 1.6167 (31st Oct high 11). Minor support located at 1.5789 (7th Feb low), 1.5699/07 (31st & 1st Jan Low), 1.5654 (30th Jan low), 1.5517/34 (23rd & 25th Jan low), then 1.5416 (19th Jan low).

UsdJpy Rise in US yields and decreased risk aversion have given the pair a new lease on life. Bullish break of bearish trend ceiling located at 76.30, suggest further upside. The move should face minor resistance at 77.24 (intraday high), 78.29 (30th Nov high), 79.53 (31st Oct intervention high), 80.24 (prior intervention high) then 81.48 (8th July high). On the downside support should come into play at 76.49 (5th Feb low), 76.05 (2nd Feb low) next support will come into play around then 75.35 (31st Oct low).

UsdChf Very choppy trading but pair has taken on a bearish tone. Jordon's confirmation of commitment to EURCHF floor has trigger new USDCHF buying. We seem to be looking at further consolidation between 0.9107 and 0.9140. Resistance is located at 0.9265 (7th Feb high), 0.9396 (23rd Jan high), 0.9596 (9th Jan high), 0.9782 (11th Jan high) then 0.9951 (61.8 Fibo retracement). Next support is located at 0.9103 (intraday low), 0.9043 (30th Nov 11 low), 0.8953 (11th Nov 11 low).