FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment was stable in Asia with most stock market indices trading broadly flat. EURUSD traded at 1.3883-1.3937 and USDJPY at 77.43-77.59. In China CPI for August was released in line with market expectations. In a speech to Congress President Obama proposed a USD 447bn job package. Although the size of the package was larger than expected some measures will still face resistance from Republicans. There was no proposal to encourage repatriation of US overseas earnings as hoped by some.
At yesterday’s press conference ECB President Trichet stressed intensified downside risks to growth. The risk to inflation is no longer regarded to be on the upside. Hence he dropped his tightening bias. A further deterioration in growth momentum may trigger a further change in stance. Fed Chairman Bernanke’s speech offered no new insights, and largely repeated the views he expressed at Jackson Hole two weeks ago. Investors’ focus will now shift to this weekend’s G7 meeting. The main focus will be on global growth conditions and the EU debt crisis. We see little scope for concerted FX intervention as demanded by Japan.
EUR
At yesterday’s ECB press conference, President Trichet stressed intensified downside risks to growth while the risk to inflation is no longer regarded to be on the upside. GDP forecasts were revised down significantly. Inflation is projected to fall below 2% in 2012. Hence Trichet dropped his tightening bias. A further deterioration in growth momentum may trigger a further change in stance.
French Finance Minister Baroin announced that no final communiqu? would be issued after Friday’s G7 meeting, which is due to continue into the weekend.
Dow Jones Newswires citing an unnamed source, said there is “serious concern” at the IMF about Greece‘s ability to implement structural reforms.
The Dutch Finance Minister said that if the IMF, ECB, or the EU finds Greece has not complied with the agreed budget reform path, Netherlands will not give further aid.
GBP
The BoE left rates on hold as expected and did not choose to alter their asset purchase program. We will need to wait for the meeting minutes due in two weeks to get a better idea of the MPC members’ views and if there has been any change in the voting split. Cable got some relief after the announcement, quickly climbing about 50 pips. This is a price reaction we have not seen in a year or so, and clearly demonstrates that the market is now alert to the risk of another round of QE.
CHF
Trichet said he had been in touch with the SNB and that he respects the SNB’s decision to intervene. This is a marked contrast to the frosty reception he gave to Japan‘s latest round of intervention at the previous policy meeting. He was clear that the situation with the Swiss franc cannot be compared with that of the yen.
Ahead of Friday’s G7 meeting, Finance Minister Flaherty said he is “concerned” about the SNB’s decision and he is worried that a currency war could have a negative impact on Canada.
JPY
Finance Minister Azumi said the economy is facing downside risks due to JPY strength. He will tell G7 Ministers that Japan is planning to take decisive steps against excessive FX moves and he wants to win the G7 Ministers’ understanding on Japan’s stance in that respect.
Our analysts do not expect that G7 Finance ministers will decide in favour of concerted FX intervention, especially as the main priority is to discuss global growth conditions and the EU debt crisis.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
GBPUSD 1.5906 support.
EURUSD BEARISH Break below 1.3951 has exposed support at 1.3837, the key low from July 12 ahead of 1.3752. Initial resistance is at 1.4288.
USDJPY NEUTRAL Initial resistance is at 77.73 ahead of 78.10, while support is at 76.43 ahead of 75.95.
GBPUSD BEARISH Initial support is at 1.5906, a break below this level would expose the key low from July 12 at 1.5781. Resistance is at 1.6111, a previous low.
USDCHF NEUTRAL Near-term resistance is at 0.8814 ahead of the key high at 0.8951. Support lies at 0.8540.
AUDUSD BULLISH Key resistance is at 1.0765, a move above this level would expose 1.0809. Support lies at 1.0482.
USDCAD BULLISH Initial resistance is at 0.9911, a clearance of this level would expose 0.9969. Support lies at 0.9754.
EURCHF NEUTRAL Key resistance is at 1.2346 and support lies at 1.2036.
EURGBP NEUTRAL Sell-off through 0.8733 has exposed support at 0.8697 ahead of 0.8643. Resistance is at 0.8842 ahead of 0.8886, the key high from Aug 10.
EURJPY BEARISH The cross targets 107.84, a break through which would open the key low from March 17 at 106.61. Resistance is at 109.95.
SCHEDULE
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