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.