FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro drifted off its highs but managed to hold on to most of yesterday’s gains ahead of the European session while risk appetite was fairly mixed. The S&P 500 closed up +0.9% on the day while the Nikkei was up +0.66% at the time of writing. EURUSD traded 1.4255-1.4330 and USDJPY 80.72-80.98. Our analysts are in line with consensus and expects the final estimate of Q1 GDP to be confirmed at 0.5% q/q. However, FX investors will likely focus more intently on parliamentary testimony by BoE Governor King and MPC members Tucker, Dale, Posen, and Miles, especially after the June minutes revealed the possibility that more QE is being entertained. The ECB’s Trichet will also be on the wires and will likely sound hawkish ahead of the ECB meeting in two weeks..
EUR
The euro received a significant boost on signs of progress regarding private sector involvement in a second Greek rescue. France’s Finance Minister Lagarde said that the government has arrived at a first draft for a deal with French banks on a Greek debt rollover. French President Sarkozy said that French banks are working on a 70% rollover of Greek debt. He described this as a ‘voluntary’ plan to avoid default, though it is unclear whether the ratings agencies or the ECB would agree.
ECB Executive Board member Stark sounded extremely hawkish, despite the recent decline in oil prices. He repeated key language that the ECB is exercising “strong vigilance”, but he also went further noting that a refi rate of 1.25% is not appropriate any longer. Our economists expect the ECB to hike the policy rate by 25 bp in July. On Tuesday morning, Stark said he sees an end to Greek aid after July if the austerity plan is not met. He said there is only a ‘Plan A’ for Greece
The euro weakened briefly after Moody’s said that deposit outflows from Greek banks accelerated in May and June, and that continued outflows are a key “credit negative” for Greek banks.
Italian newspaper Repubblica reports that Italy’s finance minister, Tremonti may quit over the national budget. The paper also says that former ECB member, Bini Smaghi may replace him.
Sky News reported that an MP from Greece’s ruling party, Alexandros Athanasiadis, intends to vote against the government’s austerity measures unless concessions are made. The ruling Pasok party require a majority to get the austerity bill through parliament this week.
GBP
MPC policymaker Posen said that it would be “nonsense” for the BoE to raise interest rates now stressing that, unlike the 1970′s, conditions for a wage-price spiral are not present.
Our analysts are inline with consensus and expects the final estimate of Q1 GDP to be confirmed at 0.5% q/q. However, FX investors will likely focus more intently on parliamentary testimony by Governor King and MPC members Tucker, Dale, Posen, and Miles, especially after the June minutes revealed the possibility of more QE is being entertained. Given Dale has voted for a hike while Posen wants more QE, a variety of opinions are likely to be expressed, leading to volatile trading conditions for sterling.
In conjunction with our economists, we lower our end-2011 sterling forecasts reflecting our belief that the BoE will wait until February before delivering their first hike. We now see cable at 1.50 (prev. 1.63) and EURGBP at 0.86 (prev. 0.80) by end-2011. Our 1m and 3m forecasts are unchanged.
CHF
We lower our EURCHF forecasts, acknowledging the reality that a comprehensive solution to the Greek debt crisis is not likely any time soon. Our 1m forecast now stands at 1.20 (prev. 1.25) and the 3m falls to 1.25 (prev. 1.32).
TECHNICAL OUTLOOK
EURGBP clears 0.8952
EURUSD BEARISH Initial support is at 1.4103, a move below which would expose 1.4074, the key level. Resistance is at 1.4358.
USDJPY NEUTRAL A move above 81.06 would develop positive momentum and open the way to 81.33. Initial support lies at 80.29.
GBPUSD BEARISH While resistance at 1.6075 holds, there is potential for weakness towards 1.5914 and 1.5881.
USDCHF BEARISH Scope for further downside towards 0.8300 ahead of 0.8165. Resistance lies at 0.8463.
AUDUSD BEARISH Initial support lies at 1.0390, a decline through which would expose 1.0359. Resistance is at 1.0601.
USDCAD BULLISH A break above 0.9913 would open the way to 0.9953/74 area. Initial support is at 0.9771.
EURCHF BEARISH A move below 1.1806 would signal further losses towards 1.1721 and 1.1684. Initial resistance lies at 1.2000.
EURGBP BULLISH Momentum is positive; break of 0.8952 has paved the way for a climb to 0.8976 ahead of 0.9000. Support lies at 0.8848.
EURJPY BEARISH Initial support is at 113.78, break below which would open 113.42; a recovery through 115.83 is required to offset the losses and expose 116.47.
SCHEDULE
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