Dollar: back to the range but not to ‘square one’

EUR USD (1.2870)
To anticipate some short-sales of euro by short-term traders near $1.29 yesterday required very little detective work. This has been day-traders’ favourite strategy since the start of the month. And it has also worked splendidly – on more than one occasion. Similarly, given the high visibility of the 1.2910 level in the market, no sleuth work was required to guess that stop-losses on shorts may lie somewhere beyond there. That is precisely what happened on Monday. It was for this reason that we were reluctant to interpret an uptick as bullish until at least 1.2940 was overtaken. This level proved to be the peak.

But this was not all that happened yesterday. The modest upmove in implied volatility suggests that the euro’s strength was not only causing discomfort for those who had sold spot since the European open, but, at least initially, also for those who had been selling options over the last fortnight. We therefore believe that a renewed price advance will not get stuck again; 1.2940 is weaker now and we cannot expect it to hold a second time, but it remains the trigger point for gains to 1.3090 (the risk-limit to a bullish view must subsequently be set at 1.2890). In the meantime, be warned that the good supports are far away at the moment. The first good demand point only comes in at 1.2710.

USD JPY (116.00)
Yesterday’s muted gains were largely attributed to a pick up in carry-trading activity – the catch-all explanation for every uptick since the ‘seasonal demand for yen’ theory fell out of fashion. On Monday, there was also a suggestion that the new basket used for calculating Japanese inflation would yield a lower figure and thereby restrain the BOJ’s room for manoeuvre on monetary policy. However, the dollar was still not able to leave the familiar range. The situation remains neutral therefore. The first resistances stand at 116.50 as well as at 117.05. The first demand levels are now at 115.20 and at 114.70.

EUR JPY (149.30)
The euro’s surge to yet another new high has accelerated the upswing and opened the potential for a near-term move to 150.65. The development also means that we must refrain from any dip-buying attempts. Indeed, a renewed decline below 148.90 now would actually be a worrying sign that would suggest a broader correction to 147.70 in the pipeline.

GBP USD (1.8930)
Yesterday’s revival was enough to lift the Pound beyond some of the better nearby supply points. As a result, despite the modest overnight setback, we currently target further gains to 1.9400. The first intermediate point to the upside now comes in at 1.9050. The risklimit to the new bullish scenario must be set at 1.8870. We continue to note, however, a critical downside point at 1.8800.

AUD USD (0.7620)
A new sideways consolidation for the AUD was already on the cards yesterday morning. The outlook remains the same today. The supports at 0.7565 and at 0.7545 and resistances at 0.7675 and at 0.7710 represent the best chances to define the borders of the current range. Only beyond the higher of these will the two-month uptrend be resumed (0.7805).

Neither stale news nor fresh can stir the dollar

EUR USD (1.2870)
The recipe for Friday’s oscillations contained some very familiar ingredients: sag terror alarm on a UK airplane, evidence of robust growth in the eurozone; signs of slowing growth in the US which further diminished interest rate expectations prompted; rumours of central banks on the bid as well as on the offer; and freshly rising tensions in southern Lebanon as Israel is accused of breaking the cease-fire. By now, of course, the ability of any of these things to durably influence the trajectory of the euro had been weakened. The only new element in the mix was the lower oil price. Albeit briefly, NYMEX crude dipped below $70 for the first time in two months on Friday. However, currency market commentators have been generally slow to draw any conclusion for the dollar as a result of the falling crude prices (most of which ought to be negative anyway). Thus, the euro clung to the centre of its recent sideways range and volatility continued to languish near the year’s low.

Our near-term view remains neutral on the single-currency. Our first downside level precisely limited the dip on Friday. But demand at this 1.2785 point will be weaker now. Better bids are only to be expected starting at 1.2735. On the upside, the previous high at 1.2910 is a very visible point for the market, but only a break of 1.2940 would give a reliable signal for higher prices.

USD JPY (115.60)
The dollar was essentially immune to any news on Friday; it simply re-traded a part of the range from the previous day. Not even the Chinese rate hike could have a durable influence on the price. We maintain a neutral stance for the moment. The levels 117.05 and 116.60 ought to present obstacles to the upside in the term near-term. The first supports remain at 115.50 and at 114.70.

EUR JPY (148.90)
The near-term potential remains for slightly higher prices, now to 149.30/45. Any acceleration (150.30) to the current slow climb higher must await a break there. In case of a correction, robust support is indicated at 147.70/80 now. We would take advantage of a retreat to this demand level to open a bullish strategy whose risk-limit would be set immediately below. The critical downside point is sighted much lower at 146.50.

GBP USD (1.8860)
Continued disappointment with the Pound resulted in further weakness on Friday. We suspect that the sellers were the very same that bought on dips earlier in the week. Therefore, this stop-loss activity could already have been completed ahead of the weekend. Fortunately for Sterling, the slide stopped fractionally short of our critical support. For today, this key downside point stands at 1.8765; a violation there would indicate that a longer, deeper correction is underway to 1.8670 and then to 1.8500. To the upside, any surpass of 1.8980 can safely be treated as bullish.

AUD USD (0.7590)
Gold price weakness appears to have taken heavy toll on the AUD, which had to give back all the gains from earlier in the week. We now reckon with a near-term consolidation. We must concede that the nearby supports are rather weak, which means that the lower border of the range may not be built ahead of 0.7525/30. Overhead, resistance stands at 0.7645 and at 0.7710.

Traders are not ready to give up on inflation

EUR USD (1.2850)
Another set of inflation figures, for which the market was obviously ill-prepared, came courtesy of the US Bureau of Labor Statistics yesterday. The Tuesday’s PPI number had already caused some consternation: some didn’t believe it, some thought that it might have been manipulated for political gain; many simply ignored the headline number and sifted the details for inflationary nuggets. But nobody was ready to revise their prediction for consumer prices because the historical in-month correlation was so poor. As a result, the CPI release had the same impact as the PPI on the previous day. But even now, analysts are not ready to give up the fight. The PCE deflator is anyway the Fed’s preferred measure of inflation, retorted one commentator in an effort to devalue the last two figures. And, don’t forget, there is still another set of PPI and CPI numbers to come before the FOMC meets again.

That market participants are not ready to give up on inflation is probably more pertinent for the bond market than for the euro. The stops on any long dollar positions were probably hit already and the single-currency still trades the same essentially 200-pip range that it has held for the last there weeks. Good near-term support is likely at 1.2785 as leftover positions from yesterday try to square up. To the upside, only above 1.2925 will we get the indication that the longterm sellers from last week have retreated.

USD JPY (115.65)
A further decline in the dollar has left it barely above its best near-term support – 115.45. Together with the recent weakness have come reasons why it must be so – this time traders have highlighted the increasing preference among Japanese retail investors for domestic investments. Once again, market participants reveal an unusual flexibility in their opinions. This suggests that their commitments are low and that their reference points are nearby. Thus, although a violation of the key support would open the door to a 200-pip slide, there is no reason to believe that this would be particularly dynamic as there are few wrong positions to be squeezed. To the upside, the initial hurdles are now at 116.10 and at 117.35.

EUR JPY (148.60)
A fresh overnight high and increasingly shallow corrections means that the nearby potential is now to 149.50. One can reckon with support on dips already at 148.10/20.

GBP USD (1.8975)
As suspected, the Pound underperformed during the latest bout of dollar weakness. The minutes from the latest MPC meeting and the diminished prospect of more UK rate hikes meant that some of the recent dipbuyers unloaded their positions even earlier than the 1.9050 level mentioned in the last report. Only once this barrier is overtaken will we call an end to the corrective phase. In the meantime, further selling could push prices modestly lower again. Below 1.8885, prices would slide to as low as 1.8755 (critical).

AUD USD (0.7670)
Follow the surpass of the 0.7655 supply point, prices rallied all the way back to 0.7700 yesterday. We already look for additional near-term gains to 0.7740. To the downside Supports are now noted at the break point (0.7655) and at 0.7590. The latter should now be treated as critical.

Market’s view of Fed policy is too volatile

EUR USD (1.2785)
Yesterday’s US PPI numbers prompted a hasty revision of the hawkish opinions that prevailed following Friday’s import prices number. This earlier reaction had anyway been overdone: we suspected at the time that the release’s proximity to the Fed ‘pause’ decision had caused market participants to overweight the information. Today, we are equally surprised to hear commentators claiming that the Fed might already have done too much. Could traders be doing the same thing this time around, just in the opposite direction? Certainly, some strategists are eying the ‘devil in the detail’ and highlighting risks for future inflation. But one thing is clear from the recent opinion swings: the market view of monetary policy is infinitely more volatile than the Fed’s and therefore wrong by definition.

Indeed, it is arguable whether any release this month will cause the FOMC to hike in September. Although the stock markets were in celebratory mood yesterday and bond yields shifted markedly lower across the curve, the dollar’s reaction was more modest. Against the euro, the day’s range was less than average and the single-currency failed to overcome the first solid resistance at 1.2810. This level remains an important upside hurdle; a break there would herald a move back to the recent 1.2910 high. To the downside, the euro is at least better supported now, both at 1.2720 and 1.2635.

USD JPY (116.05)
Tuesday’s US inflation data resulted in an abrupt slide below ¥116. But this move probably did not cause too much discomfort among short-term traders, due to the absence of any positioning bias. In the morning, the market discussion circulated around the sudden drop in the yuan and the prospects of a US acquisition by a Japanese bank. But, by the end of the day, the arguments had shifted effortlessly back to US growth prospects and to the FOMC. The first support was nonetheless pushed aside and a key level is now exposed at 115.45. A break there would indicate a 200-pip slide in the pipeline. Whether we will be able to construct a bearish strategy depends on how and when it gets to the trigger point. For the moment, the useful resistances are too far at 116.75 and at 117.35.

EUR JPY (148.40)
The euro regained the recent high at 148.60 yesterday. However, even in the case of a new record, we would still expect to see offers coming in at 148.80. Only beyond there will the going become easier up to 149.50. The critical level to the downside remains at 146.10. Intermediate support comes in at 147.90.

GBP USD (1.8935)
As Cable has acquired a few more longs during its recent correction, it was not able to get too much mileage out of yesterday’s US PPI numbers. We would expect to see more offers emerging as it climbs towards the first good upside point at 1.9050. Only once this level is overtaken could we call an end to the corrective phase. In the meantime, the risk remains for lower prices again – although this should probably be revised to 1.8700.

AUD USD (0.7640)
The A$ tested the critical demand zone at 0.7580/90 yesterday and recovered again. The rebound took it to our first 0.7655 supply point. Above this upside point, further bullish potential would be unleashed up to 0.7735 and the general demand situation would improve. Until this happens, however, the critical downside point is the only support and a violation there would still trigger a further weakness.

Search for volatility yields nothing

EUR USD (1.2735)
There were a number of events that might have stirred hopes of currency volatility among market participants yesterday: signs of a faster pace of growth in the eurozone and its implications for ECB monetary policy, for example, or a decline in risk-aversion due to the ceasefire in the Lebanon or to the relaxation of security restrictions at UK airports. But it was not to be. The euro traded a relatively narrow range. It bounced repeatedly off our 1.2710 support during the European and US sessions, completing a very visible lower border to a broad congestion area in the process. In Asia this morning, it violated that lower border to hit a low of 1.2695, but rebounded almost immediately to the current level. It is therefore possible that a downside ‘false break’ has just taken place. However, some confirmation will be required before we can consider this development as bullish.

The first problem is the lack of good nearby demand. Apart from a very distant point at 1.2420, the single-currency is very poorly supported at the moment. The second problem is the lack of volatility. There is no noticeable bias in the market; nobody is in difficulty at current levels, so there is no catalyst for a sizeable move in either direction. As a consequence, only following a renewed break above 1.2810 could the situation be labelled as positive.

USD JPY (116.45)
As in the euro, traders would have preferred to see more volatility. They foraged among the news stories – a power outage in Tokyo, Koizumi’s visit by to the Yasukuni Shrine, the upcoming US coupon payment – but there was nothing that could produce a decent price move. Although we consider the dollar stable, there is no sign of a bearish bias that could fuel a rally. Indeed, no directional bias is apparent at all. The nearby points are 116.10 and 115.55/60 to the downside, and 117.35 to the upside.

EUR JPY (148.40)
The euro scraped against the recent highs during yesterday’s session. But even in the case of a move into fresh upside territory (above 148.60), we would still expect to see immediate offers coming in at 148.75/80. Only beyond there will the going become a little easier up to 149.50. The critical level to the downside stands now at 146.10. But this point is now well defended by an intermediate point at 147.75. In case of a move to new highs, one must still expect offers to immediately emerge at 148.75.

GBP USD (1.8920)
Sterling had been one of the currencies that had caused a great deal of difficulty for traders over the last few weeks. However, Cable’s correction over recent sessions has given a chance to those who had missed out on the prior rally (or who were on the wrong side of it) to step on board with little pain. This means that, in case of a bounce, profit-taking will kick in as early as 1.9050. It also means that the risk for a correctional drift down to 1.8670 has also emerged. Earlier support stands at 1.8800.

AUD USD (0.7595)
The A$ missed a chance to build an early base yesterday when it violated our initial support. It has subsequently slipped all the way back to what is now a critical demand zone at 0.7580/90. A violation there would leave the AUD vulnerable to further downside reaction to 0.7530 or to 0.7485. Even in the case of a rebound, it will not be too easy to regain its former bullish pace due to improved supply now at 0.7655.

USDJPY directional preference is not one-sided

EUR USD (1.2755)
Euro weakness continued on Friday. Especially following US data that showed fractionally firmer import prices and stronger retail sales than the market had expected. This re-opened the debate about the wisdom or otherwise of the Fed’s decision to pause last week. Of course, the new information is unlikely to have any noticeable impact on the Fed’s medium-term forecasts, which are the basis of its rate decisions. But the apparent undermining of its two key assumptions, slowing growth and peaking inflation, just days after they were restated, may cause market participants to overweight the data. Central bank selling was also cited on Friday – for the second consecutive day. This offer is still in the domain of rumour. But we do note at least two occasions by short-term traders to try to pick a bottom over the last two sessions.

In both cases, this effort came to nothing. There must be some sellers in the market who are obviously not buying the positions back again. Friday’s post-data decline to a 1.2715 allowed us our desired entry into the ‘last’ bullish strategy that we described in our previous report. The risk-limit was (and still is) set exceptionally tight at 1.2710 as, below there, a worrisome demand situation exposes a risk down to 1.2420. The objective to the new strategy is a return to the recent peak at 1.2910.


USD JPY (116.40)
Weak Japanese GDP data and strong US retail sales figures caused traders to review their predictions for the interest rate differentials on Friday. Yet, although the dollar rallied steadily to a 116.40 peak, the news focus is by no means one-sided. Yuan flexibility remains a dominant theme, especially as it is being addressed more directly by the new US Treasury Secretary. Traders also note the BOJ’s efforts to keep the door open to the idea of more rate hikes this year. Thus, a directional bias is still not apparent. The nearby points for the dollar are at 115.55/60 and 1115.05 to the downside, and at 117.30/35 and 118.40 to the upside.

EUR JPY (148.35)
The cross rebounded comfortably from its midweek correction on Friday. The critical point to the downside, 146.10, was never in danger. This point remains valid for today, but the euro is better defended at 147.75 now. In case of a move to new highs (above 148.60), one should still expect offers to emerge almost immediately at 148.75. Only beyond there will the going become a little easier up to 149.50.

GBP USD (1.8935)
We suspect that would-be dip-buyers had their chance to act at the end of last week. This means that Cable has lost much of the dynamism that drove it higher over the last few weeks; in case of a bounce, profit-taking will kick in as early as 1.9050 now. This also means that the risk for a correctional drift down to 1.8655 has also emerged. Earlier support stands at 1.8780 for today.

AUD USD (0.7675)
Friday’s late slip back to our 0.7655/60 support zone, gave us the opportunity to re-open a bullish strategy. This level, which proved to be the low, also marks the exceptionally tight risk-limit to the strategy. The objective is at 0.7810. Intermediate resistance stands at 0.7745.

Dollar holds range despite major world events

EUR USD (1.2770)
Range-traders managed to keep the euro firmly hemmed in yesterday. It is even remarkable that it still trades the same range that was put in place last Friday – and even that was no more than average. Yet much has happened in the meantime: a possible halt to the Fed’s two-year tightening cycle and a major terror alert. The euro met (predictably) good selling as it retested the recent 1.2910 highs. Trading volumes were very robust – especially in the high $1.28s – which means that many people were in on the act (according to market talk, even central banks). The US trade figures were finally just a footnote to the day’s activity. The euro fell thereafter, but not because of the number; traders simply waited for the release to be out of the way before doing what they had planned to do anyway.

Our dip-buying effort from yesterday came unstuck overnight as the single-currency retreated to a 1.2745 low (apologies). But all is not lost. Good support still remains at 1.2710 and this would also merit a ‘last’ bullish strategy (already at 1.2725). The risk-limit would have to be set immediately below as the demand situation deteriorates dangerously thereafter, exposing a risk down to 1.2430. To the upside, any move above 1.2860 would suggest a re-stabilisation.

USD JPY (115.50)
The dollar simply re-traded a familiar near-term range yesterday. Among a mixed market discussion, talk about a revival of carry-trading, a review of the prospects for yuanflexibility and, later on, the implications of oil-price weakness, all made an appearance. No consistent theme developed to suggest that traders adhered to any directional preference. We therefore continue to anticipate further sideways action. We monitor nearby points at 114.90 and 114.50 to the downside, and at 115.90 and 116.75 to the upside.

EUR JPY (147.60)
The cross corrected more forcefully from our tough overhead point yesterday. As mentioned in our last report, the euro has already filled its near-term upside potential, so we can no longer subscribe to the idea of buying on dips. Indeed, a violation of support at 146.10 would open the door to even greater downward correction. Initial demand comes in at 146.90 today. Any rebound will now meet resistance at 147.90. One can even anticipate good supply at 148.70 in case of a move to new highs.

GBP USD (1.8920)
Cable ought now to have moved back to levels that would-be dip-buyers should find attractive. Although it is possible that yesterday’s UK terror alert scared off some buyers, we assume that many of those who had missed out on Sterling’s prior upmove (or who were on the wrong side off it) have had the chance to cover. This will take some of the dynamism out of the uprend, meaning that good supply will already be apparent at 1.9050 and that the risk for more downward corrections to 1.8655 must be considered.

AUD USD (0.7710)
Our previous objective at 0.7710 capped the upswing yesterday and remains the most important overhead hurdle. Beyond there, we would look for further immediate gains to 0.7810. Support, now at 0.7655/60, would serve as a new downside risk-limit for a further bullish strategy – either following a break higher or in the case of an earlier dip.

AUD renaissance catch traders on the hop

EUR USD (1.2875)
Yesterday’s one-way price action alone was sufficient to demonstrate the earlier Asian sell-off had more to do with poor liquidity than with any market conviction about the dollar. Indeed, as the euro recovered, so the belief seemed to grow that the peak in US rates has now been seen. However, the initial weakness was not without its consequences: short-term longs that had been in the market were stopped out. This meant that the single-currency met no profit-taking offers as it rose. Indeed, the only remarkable sellers were the top-pickers who emerged just ahead of last week’s 1.2910 high. These sales succeeded in pushing the euro back to 1.2855 in NY. This is the situation that prevails this morning.

The problem with supply that is the result of short-term top-picking is that the positions must be bought back. Thus, it is rarely able to produce a durable peak. It can be successful for a while – as was the case yesterday – so it remains an appealing strategy. But it usually ends in tears. This is why ‘double-tops’ and ‘double-bottoms’ are so rare. The preference does give us the opportunity to retry a bullish strategy in case this selling pushes the price as low as 1.2825. We would then set the risk-limit at 1.2765. Alternatively, a short-squeeze would be triggered in case of a move to a new high. But from a risk-reward perspective, the subsequent gains to 1.2990 may be too meagre for a bullish strategy.

USD JPY (115.05)
Our bullish strategy was an early casualty of a renewed dollar weakness yesterday (apologies). The decline was not huge, but all the dynamism of the recent rally was lost and the market has moved back into completely neutral territory. Strong Japanese machinery orders, exporter selling and a statement by the PBOC were all (unemotionally) blamed for the decline. Interestingly, former arguments, for example about Japanese investor behaviour following a Fed pause, have not resurfaced. Trader conviction does not appear high in either direction. Look for nearby support at 114.30 and at 113.95 (critical). We pin supply at 116.10/20 and at 116.90.

EUR JPY (148.15)
Yen weakness against the single-currency was one of the reasons why commentators had so much difficulty in getting to grips with the USD/JPY. Yesterday’s new euro high got stuck, as expected, at our 148.50/60 resistance. This remains the point beyond which an upward acceleration (149.90) would be likely. To the downside, the first supports are at 148.05 and at 146.90. But, as a result of the new high, we can no longer subscribe to the idea of buying on dips.

GBP USD (1.9070)
Disappointing trade figures and, this morning, a terrorist alert have taken their toll on the Pound – but the dollar has been weaker still. So, would-be buyers have still seen no dip into which they can buy. While Cable holds above 1.8910, a near-term bullish potential to 1.9340 will remain. This support must also be treated as critical, as a violation would announce corrections that could drag the Pound to as low as 1.8605.

AUD USD (0.7710)
Objective achieved. The A$ has soared almost two percent since yesterday and this development is almost certain to have caught many traders on the hop. Beyond this first 0.7710 target level, therefore, we would look for further immediate gains to 0.7810. Support, now at 0.7655/60, would also serve as a new risk-limit for a further bullish view.

Traders are comfortable with post-Fed dollar

EUR USD (1.2820)
The long-awaited – almost fabled – pause in the Fed’s tightening policy finally took place last night. The initial reaction was a rally to a 1.2895 peak. This was probably the stoploss buying of the ‘residual’ dollar-bulls that we discussed yesterday. And that was it. The euro simply oscillated thereafter around the pre- Fed level and closed unchanged on the day. The Fed statement was generally perceived as less hawkish than expected; hence some euro longs may have been built in the aftermath. But these were surely liquated in a thin market this morning, as the single-currency sold off to a 1.2770 low. In any case, the debate continues to rage about whether the peak in rates has been seen. However even the hawks must concede that inflationary readings in the next few months will be the product of mechanisms set in motion quarters ago. To react with hikes whose impact will only be felt many quarters ahead would expose this decision as the wrong one. The prospect of higher rate must surely cease to be positive actor for the dollar.

The risk-limit to our bullish scenario was also violated overnight (apologies). A renewed rally would now run into offers at 1.2845, a level where leftover longs from yesterday may remain. To the downside, weakness below 1.2770 will put additional pressure on the euro. But due to the appearance of better demand now at 1.2685, this may be difficult to exploit.


USD JPY (115.40)
The immediate decline that followed the Fed decision seemed merely to have served as a springboard for higher prices. Overnight, the dollar scrambled to a 115.75 peak and, in so doing, overtook our bullish trigger point. Therefore, we currently target gains to 118.30, with a single intermediate point visible at 116.20. However, to maintain this dynamism, the USD cannot tolerate any further sizeable corrections. For this reason, we set the downside risk-limit as tight as possible at 115.10.

EUR JPY (147.90)
We continue to expect additional near-term gains for the cross to 148.50/60 (fractionally adjusted). A move beyond this hurdle would even permit an upward acceleration (149.90) to what has so far been a very sluggish trend resumption. To the downside, the first support at 146.90/00, would offer a dipbuying opportunity (tight risk-limit). The bearish trigger stands at 146.00.

GBP USD (1.9040)
The post-Fed rally hoisted Cable to yet another new high at 1.1935 overnight. This means that the correction, when it came, barely brought the price back below $1.90. Sterling sceptics will still be struggling here, so we continue to reckon with good support from would-be dip buyers at slightly lower levels. Whilst it holds above 1.8910, a near-term bullish potential to 1.9340 will remain. But this support must also be treated as critical, as a violation would announce corrections that could drag the Pound to as low as 1.8605.

AUD USD (0.7585)
This morning’s dip – right to the very limits of the AUD’s stable territory – gives us chance to bet on a bullish strategy with limited risk. For a target at 0.7710, we can already set the downside limit of a new bullish scenario at 0.7650. The first supply point comes in at 0.7620.

Traders focus on ‘residual’ Fed risks

EUR USD (1.2820)
Yesterday’s steady drift lower confirmed our suspicion that last week’s sideways-trading mentality was not compromised by the post-NFP rally. Range-bets were not fully unwound during the push higher and, as Monday’s session drew on, fresh sellers were possibly encouraged by the absence of any upside follow-through. The logic for the bears was simple: a Fed pause is all but priced in, but there is still the residual risk of a hike. And, of course, there is also the likelihood that the FOMC continues to talk tough on inflation even if there is no hike. The BP oilfield closure and the corresponding leap in the crude-price to a record high certainly did nothing to dispel inflation fears.

The current target remains 1.2990. Despite the downward correction, the euro has held above the best nearby demand points, now at 1.2790 and at 1.2750. The former still serves as the risk-limit to the current bullish scenario. A violation of the second would leave the single-currency looking vulnerable once again. Given the paucity of good supports thereafter, the risk would even be down to 1.2485.

USD JPY (115.20)
Dollar weakness similarlyran out of steam against the yen on Monday. A renewed rally beyond $115 revived a discussion about the prospect of a pick-up in US Treasury accumulation by Japanese investors once the Fed tightening cycle comes to an end. This was an opinion that was already floated in the middle of last week, but seemed to have been forgotten during the post-payroll sell-off. We continue to hold a neutral opinion on the market. In case of a move higher, the level 115.55 still marks the first important hurdle. Following a break there we would anticipate a buying scramble that lifts the price to 118.30. In the meantime, one should note supports at 114.50 and at 113.35/50.

EUR JPY (147.70)
We continue to expect the euro to climb to a marginally higher high (148.35/50) within the current half-hearted trend resumption. An upward acceleration to 149.80 would await a move beyond this hurdle. To the downside, the first support remains at 147.00. The bearish trigger is now at a distant 145.90.

GBP USD (1.9060)
Yesterday’s softer-thanexpected economic data from the UK did nothing to diminish the frothy interest rate expectations. Despite across-the-board dollar strength, the Pound managed to hold on to almost all the gains from Friday. The near-term bullish potential has been stretched to 1.9340. This will remain the case as long as Cable holds above 1.8905. The critical downside point remains at 1.8865/70.

AUD USD (0.7615)
The A$ reinforced its recent narrow range after it was again rejected ahead of our 0.7680 resistance. This level remains the trigger point for another run at 0.7810. To the downside, a break of 0.7575 must be seen before any lasting downward correction would unfold.

UK rate forecasters could be overdoing it

Sorry i am late today, had a conference almost all day long.

EUR USD (1.2875)
It was cruelly ironic that the much-maligned ADP employment forecast should outperform the market consensus for Friday’s US non-farm payrolls. But the reason the market so readily dismissed this private forecast had less to do with its spectacular mis-prediction from the previous month and more to do with trading consequences of accepting it. To embrace the ADP number and to downgrade one’s existing forecast would have meant selling the dollar and buying the euro around $1.28. This was obviously something that most market participants did not want to do near the top of the perceived range.

The current target is 1.2990. However, we already believe that gains to as high as 1.3310 are achievable within the current upswing. Some stops on shorts were undoubtedly hit on Friday, but it is unlikely that all the ‘underweight’ positions created during the repeated tests of the upper border over the last few sessions were fully unwound so quickly. So far rumours of ‘sovereign’ sales have limited the single-currency’s advance, as they have provided a reason for not buying euros. But short-covering on dips has to be expected in any case. The best supports are at 1.2790 and at 1.2730. The former serves as the risk-limit to the current bullish scenario.

USD JPY (114.55)
Despite rumours of official bids for the dollar, the former discussion about seasonal demand of the yen and talk about yuan flexibility has again come to the fore. This still seems to be the consensus opinion. Although some dollar shorts were nudged out last week, our key upside point was not overtaken so there was no scramble. Today this pivotal point stands at 115.55, where a break would target 118.20. In the meantime, there remains the risk down to 113.35.

EUR JPY (146.40)
We currently expect a climb to a marginally higher high (148.50) within the current half-hearted trend resumption. Intermediate resistance already stands at 148.10. To the downside, the first support is at 147.00 and 145.75 continues to mark the bearish trigger.

GBP USD (1.9060)
UK rate expectations ahead of the year-end have been jacked up since the latest rate hike. After having failed to predict the lat BOE move, there could be a danger that forecasters overdo it in the other direction now. Curiously, nobody is talking about a ‘window of opportunity’ for the Bank to hike rates before a US slowdown kicks in. This is an argument that was frequently cited in the context of ECB tightening, yet (to the extent it is valid at all) it would certainly be more pertinent for UK policy than for the eurozone’s. The move to a new 15-month high has more than satisfied the bullish potential that we identified last week. It has also stretched the nearterm possibilities to 1.9340. As long as Cable holds above 1.8905, it remains clearly bullish. The critical downside point stands at 1.8865/70.

AUD USD (0.7655)
The A$ recovery almost reached our second 0.7680 resistance on Friday. As before, we reckon that another run at 0.7810 would follow any move beyond there. To the downside, demand has improved at 0.7630, but one must see a break of 0.7575 before any lasting correction would unfold.

‘Code-word’ analysis belongs to Greenspan era

EUR USD (1.2795)
Even before the ECB raised rates, a surprise hike by the BOE ought to have provoked some soulsearching among central-bank watchers. But the immediate comments following the Trichet press conference suggests that little reflection took place. Commentators declared that his use of the expression ‘closely monitoring’ usually means that rates will rise again within two months, so the next hike must be pencilled in for October. But the ECB chief has repeated said that decisions are not taken in advance and that the Bank eschews the use of code-words. What’s more, there have only been four rate moves in his presidency: what is usual? Watchers seem hell bent squeezing the ECB into a Fed-based model of central bank communication that dates back to the Greenspan-era. The new Fed Chairman, as well as Mr Trichet, want the market to do its own analysis and not rely on the central bank to tell it where and when rates are going.

Good selling continued ahead of the upper border (1.2850) of the perceived sideways range yesterday. These sales almost certainly included some short-selling among the continued liquidation of longs. We would therefore become bullish on a break for an objective at 1.2990 and beyond (1.3310). To the downside, shortsellers will provide demand in the 1.2685/00 zone, where we would also try a bullish strategy with a risk limit set immediately below.

USD JPY (115.10)
The dollar’s stagnation since the start of the month has no doubt brought some disappointment for those who thought that it would weaken further for seasonal, yield, or other reasons. Yesterday’s modest rebound probably reflects some short-covering. But we do not believe
that a scramble will take place until 115.70 is overtaken. In this case, we would target gains to
118.50. In the meantime, there is still a risk down to 113.35. Any early dip below 114.55 would be indicative of another round of weakness.

EUR JPY (146.40)
The euro just tested our first overhead point yesterday and then slipped back again. A break of this 147.50 level (weaker) could now be achieved, but we would only anticipate another 100-pips to the upside (148.50) within this trend resumption. To the downside, the first support is at 146.70 and 145.75 continues to mark the bearish trigger.

GBP USD (1.8875)
In the aftermath of the BOE rate hike, the Pound was able to capture the lion’s share of the upside potential we discussed yesterday; it stopped just 50-pips short of our 1.8965 level. Beyond there, one would have to reckon with marginally new highs at 1.9030. To remain positive, 1.8720/30 is the downside level that must not now be undercut.

AUD USD (0.7615)
Yesterday’s early retreat violated our downside risk-limit (apologies) but we do not consider the AUD to be vulnerable. Although bullish dynamics have been lost, good (but critical) support remains at 0.7520/30 and this would merit a new bullish strategy with a very tight risk-limit. Supply is now sighted at 0.7650 and at 0.7680. Above the latter, another run at 0.7810 would follow.

ADP jobs forecast met with nonchalance

EURUSD (1.2755)
The publication of the ADP employment forecast was met with a wave of nonchalance yesterday. This was the guide for the US non-farm payrolls that went so spectacularly
wrong last month and traders understandably were reluctant to adjust their predictions this time around. But is this correct? Admittedly, at just under 100k, the ADP figure was not too far away from the current consensus. However, rationally, one should update one’s beliefs/knowledge according to the underlying historical relevance of incoming information. Last month, analysts considered the ADP forecast as a good indicator for the Department of Employment figure – so much so that they rushed to adjust their own forecasts in the light of it. One call that went down in flames cannot undermine the validity of the whole series. But this last episode remains very salient for most traders, very available. Many will remember what position they held, how much money they lost, etc.

As a result, the tendency will be to overweight the recent experience and to underweight the entire historical relevance of the information. The perception of a sideways range for the euro continues to be the determining factor for traders. Some may well have tried short-sales yesterday. Thus, our preferred strategy is unchanged: above 1.2850 we would target 1.2990 and beyond (1.3310). To the downside, new short-sellers will furnish demand as early as 1.2670 today. So, there too, we would try a bullish attempt with a risk limit set at 1.2610.

USD JPY (114.40)
A report that the PBOC was desirous to increase yuan flexibility hardly qualifies as breaking news. However, in a market where traders are generally well prepared for yen strength, it was widely discussed and recycled. But the dollar moved very little. We remain reluctant to propose any bearish strategy for this reason, although we do concede that the risk is for further weakness to 113.35. An important upside hurdle stands at 115.80. Beyond there, a squeeze
would lift the USD to 118.50.

EUR JPY (146.45)
The cross gave back some of the recent gains yesterday but still holds above the critical support now at 145.80. Whilst it remains below 147.50 we do not envisage any resumption of the major uptrend so we would still favour a bearish strategy in case of a violation of the key support. The target would then be 143.20/25.

GBP USD (1.8745)
Even though the Bank of Italy’s increased preference for Pounds over dollars in its official reserves has unfolded since 2004, market commentators still attributed yesterday’s Sterling rise to the publication of the fact. Cable already enjoys a bullish potential to 1.8965. But with supports too weak or too distant, 1.8690 and 1.8540, respectively, they fail to provide an adequate risk-reward profile for a bullish strategy. Additional supply comes in at 1.8825 today.

AUD USD (0.7645)
The current target remains 0.7810. The A$ retreated from a new three-month high yesterday. This morning, a disappointing business confidence survey appeared to dampen AUD interest rate expectations, which almost resulted in a test of our 0.7630 downside risk-limit. The development has erased some of the bullish dynamism, which means that intermediate supply is now to be expected as early as 0.7695. In case of a violation of the risk-limit, the next demand level stands at 0.7575.

Speculative euro-longs fear upper range border

EURUSD (1.2820)
Despite data that pointed to more US rate hikes and a speech by the new Treasury Secretary that reiterated his department’s ‘strong dollar’ policy, the euro closed at practically the high of the day. The rally was far from a one-way move however. The single-currency suffered a setback after both the PCE deflator release and after the ISM number. For those who were sitting on longs – for example, the remaining optimists in our recent EURSentiment Survey – there were ample arguments to justify taking profits ahead of the upper border of the perceived range at 1.2850. The price action therefore confirms our suspicion that such speculative accounts will sell all that they need to ahead of this threshold and that few offers will remain beyond. It also confirms that, as last week, alternative source of sustained demand is present in the market – one that is obviously unconcerned by trading ranges.

Our preferred strategy is unchanged: above 1.2850 we would target 1.2990 and beyond (1.3310). To the downside, although a new strategy within the range is not particularly appealing, we would nonetheless make a bullish try following a retreat to 1.2650. Such a move would swell the ranks of the range-traders and leave the euro susceptible to a break. The risk-limit would be set at 1.2610.

USD JPY (114.40)
A mini-squeeze yesterday briefly hoisted the dollar to our first resistance at 115.30. This shows that some traders were prepared for falling prices. But the bounce also allowed others to enter the short position – seduced by arguments about seasonal repatriation flows and Japanese rate hikes. Thus, although the risk remains for further weakness to 113.35, we are not keen to propose any bearish strategy. An additional upside hurdle remains at 115.95.Beyond there, a more sizeable (and exploitable) squeeze would unfold to 118.50.

EUR JPY (146.70)
The cross distanced itself from its critical 145.70/75 support yesterday and recovered to a 147.00 peak. It is too early to trumpet a resumption of the uptrend – the euro still faces tough resistance at 147.40 – so we would continue to favour a bearish strategy in case of a violation of the support even though it is now a bigfigure away. The target would then be 143.10/20.

GBP USD (1.8770)
The Pound has filled the initial upside potential that we indicated yesterday; the next hurdle remains at 1.8965. As yesterday, even though we can suggest higher supports at 1.8690 and at 1.8515, they are both still too far away to provide an adequate risk-reward profile for a bullish strategy.

AUD USD (0.7675)
The RBA rate hike is out of the way. However, today’s strong retail sales data seem to have stimulated fresh hawkish noises in the market. But weren’t traders talking about the need for two rate hikes just last week? Clearly, some of the former bulls liquidated their longs yesterday and may not have had the time (or seen the price) necessary to rebuild them. We now favour an immediate upward continuation to 0.7810. Intermediate resistance is sighted at 0.7705. The risk-limit must be set at 0.7630.

Fukui adds fuel to popular yen optimism

EURUSD (1.2730)
The “50-50” comment by the Fed President Poole, in reference to this month’s FOMC meeting was the only news that caused a flutter in otherwise dull trading yesterday. This probability for another rate hike was noticeably more than the market had been pricing in. However, the remark was quickly discounted: against a backdrop of falling Treasury yields, analysts are slowly coming round to the prospect of US rate cuts next year. And, in any case, Poole is not a voting member.

Traders were not obliged to act anyway. The short-term crowd had already squared up after Friday’s US GDP numbers. Yesterday’s EUR-Sentiment Survey also revealed the increasing neutrality of medium-term protagonists. They spent last week selling – with profits - some of the euros that they accumulated during the previous week. Thus, the perceived price range 1.2480 - 1.2850 is more salient for them than any ‘news’. We expect further medium-term offers between here and the upper border. Therefore any break beyond there should meet little additional supply. We would target 1.2990 in this case. To the downside, a strategy within the range is not particularly appealing. However, following a retreat to the 1.2610/30 range, we would make a bullish attempt using a very tight risk limit.

USD JPY (114.65)
The risk remains for further weakness to 113.35, but we are not keen to propose any bearish strategy. The market clearly favours yen strength. The talk is about a strong Japanese economy, thanks to yesterday’s IP numbers and about seasonal repatriation flows. This morning, the BOJ’s Fukui tried to keep warm the idea of further rate hikes this year. Thus, it is a falling yen that would cause the greatest surprise at the moment. Upside hurdles for the dollar are at 115.30 and at 116.20. Beyond the latter we would reckon with a two percent rally.

EUR JPY (145.95)
The cross flirted with the critical support at 145.70/75 yesterday but rebounded overnight. This level remains the trigger point for a more severe setback to 143.10/20. Overhead, we still note hurdles at 146.90 (subsequent limit in case of a downside break) and at 148.40.

GBP USD (1.8645)
The upside remains open for gains to 1.8775 and then to 1.8965. The riskreward profile for a bullish strategy, however, is unfavourable as the first support is all the way down at 1.8530 and the best demand only at 1.8465. A dip to the former would provide the opportunity to enter, with a risk limit set at the latter.

AUD USD (0.7625)
Yesterday the A$ retreated from our former 0.7675 target level, which remains the best resistance. So far the overnight correction has tested the first support at 0.7625 and additional demand stands at 0.7570/75. Until the latter is violated, one should not reckon with any durable setback.