Bernanke spoils pumped-up expectations

EUR USD (1.2610)
What initially looked like a quiet trading day quickly changed when the euro turned the corner in the NY session. First it hit a fresh low before it got out of the blocks and rallied straight up to almost 1.2620. With the single currency having hit a 12 week low early in the NY session, it is rather unlikely that there were many short positions in the market. But when the tide changed, it did indeed look like a squeeze with some fresh positions hoisting the single currency to where it was at the start of the week. With the market back in interest rate watching mode, the first sign of the day that signalled the possibility of a Fed rate hike sent the euro straight down. In this respect yesterday’s higher than expected US CPI core reading was more than enough to further pump up expectations.

In addition, the week started off looking rather grim for the euro – it was close to the recent lows, turmoil in the Middle East and strong US inflation data. Traders were yesterday just waiting for the Fed Chair to play his hawkish trump card to complete a perfect dollar bullish tale. It is clear that the fuelling of expectations just meant that the reference point was set very high as there was even talk that it is time for Bernanke to ‘set the record straight’ with some hawkish comments. The Fed Chief did indeed set the record straight, but it was not what many traders wanted to hear. Of note is that the Fed is still sticking to what we have already heard before – monetary policy will depend on economic data, but the comments clearly cooled expectations for an August rate hike.

Despite yesterday’s recovery, the euro remains in a neutral position. Overhead, the first hurdle is visible at 1.2665/70. Once it is cleared, however, we reckon with further gains up to 1.2865. Critical support is visible at 1.2490.

USD JPY (116.70)
The dollar hit a fresh three month high against the yen with its recovery to 118.00. The Japanese Government yesterday removed the reference to deflation from its monthly economic report, without declaring an end to deflation, which could have been a disappointment in the light of the US rate hike talks having reached fever pitch. But in the wake of the Bernanke address the dollar slumped to 116.55. For riskreward consideration we retreat from our bullish stance and even now believe that the risk is rather for further weakness to 115.10 and thereafter to 113.60. These levels could even be treated as targets while the dollar does not breach the 117.10 level again.

EUR JPY (147.10)
The cross still remains buoyant and we continue to look for fresh highs at 147.70 and thereafter to 148.60, which also mark the next reliable resistances. Because of the low number of wrong positions here, we hardly see any extravagant moves and it also explains why subsequent highs are just a dash higher than the previous ones. To the downside one can expect to come across the first support at 145.90 while 144.90 marks the critical demand point.

EUR GBP (0.6835)
The current objective remains 0.6730. For the time being intermediate support comes into play at 0.6815/20. On a bounce, the 0.6875 risk-limit to our bearish orientation should not be violated.

GBP USD (1.8450)
The knee-jerk reaction was to sell Sterling after the BoE minutes showed a unanimous vote to keep interest rates on hold even though this was expected. However, soon market participants simply fell back on the old inflation figures of the day before and decided that a rate hike is indeed somewhere on the horizon. The subsequent buying interest meant that cable jumped beyond our 1.8345/50 limit yesterday (apologies). This morning it is fighting with 1.8475, which also marks the short-term point for stability. Beyond there, initial gains to 1.8610 could be in the pipeline. Supports are visible at 1.8325 and at 1.8230 (critical).

AUD USD (0.7505)
Yesterday’s break below 0.7445/50 resulted in limited weakness to 0.7405 only, before the AUD quickly reversed direction again. The position is neutral this morning with upside potential to 0.7570, which represents the only reliable near-term resistance for the moment. The latter will be the gatekeeper for an even stronger recovery (0.7635). Expect demand at 0.7465 while 0.7405 is critical.