Focus on ECB Post BOE’s status quo Stance

Last week, the Bank of England remained in focus as most market participants expected the central bank to cut rates after the officials met for the first time post-Brexit vote. Officials voted 8-1 in favor of keeping rates unchanged but the governor hinted towards taking steps in August. After a sell-off in yields of major countries most of them have rebounded last week primarily on back of short covering. Our view on yields continues to remain bearish as easing across major countries will continue to weigh on it but we are also looking for a big reversal in the yields in the next 3-6 months. After Bank of England, market participants will be keeping an eye on the ECB policy statement; expectation remains high that the central bank will consider taking further easing steps at its September meeting but cues for the same could be given at this week's meeting. Inflation from the UK will also be keenly watched and if the number beats estimates then the pound could get support on lower levels.

YIELD CURVE CHART: (US, EUR, UK AND JAPAN)

 

EURUSD

The Euro remains under pressure in the last week weighed by bearish sentiment, raised concern for the short term outlook for the euro area countries. The EURUSD pair closed last week around 1.1034 with marginal loss against US dollar after stronger than expected data raised expectation of interest rate hike from FOMC. Safe haven trades also returned after the attack in France and the coup in Turkey. Further, Bank of Italy said on Friday after similar indication given by IMF earlier on Tuesday that Italy's economy will grow by less than 1% this year and only marginally faster in 2017. Further, on Friday Euro zone released its final CPI which rose to 0.1% year-on-year, Eurostat said, confirming its initial estimate of two weeks ago and Month-on-month, the increase was 0.2 percent. In this week, focus in on ECB's Governing Council meets on Thursday to determine whether its monthly purchase of 80 billion Euros ($89 billion) of assets, along with zero interest rates and free loans offered to banks, are sufficient to prevent a deflationary spiral. Furthermore, German ZEW economic sentiment and Euro area's flash manufacturing and services PMI would be important to event to watch for.

 

Technical view for EURUSD

After gaining most days of the last week, EURUSD pair fell sharply on Friday to close the week below 1.1050 levels. The pair is still trading in tight range of 1.0950-1.1200 zone post-Brexit period. Technically, the pair could face resistance near 1.1180 levels, above which it could move towards 1.1250 levels. However, bias remains bearish in the near term. On the downside, break below 1.0950 will open the door towards 1.0850-1.08 will levels. Hence, it is advisable to go short below 1.10 for the target of 1.0800 levels.

 

GBPUSD

The British Pound strengthened for only the second week of the past seven as a key surprise out of the Bank of England and positive political developments lifted positive concern over the growth of the UK economy. In the last week, slashing the most anticipated rate cut and easing, BoE unexpectedly kept interest rates unchanged at 0.5% and QE at GBP 375Bn in its first post-referendum meeting. Immediately after announcement, Sterling Trades at Two-Week High of $1.3480 and FTSE 100 to 11-month high. However, they have kept door open for August. Still, the fragility of the recovery was highlighted on Friday as Bank of England Chief Economist Andy Haldane said he would probably push for stimulus next month. Before policy meet, Traders sent the British Pound higher on news that Theresa May would become the new Prime Minister. On volatility front, Sterling's implied one-month volatility versus the dollar declined this week to the lowest since June 24, led to recovery in the pound. The Bank of England is set to meet again next month, and the country is still to negotiate the terms of its EU exit. A busy UK economic calendar in the week ahead could spark some short-term currency moves starting with UK economic data with inflation, unemployment, and retail sales figures due on three consecutive days starting July 19.

 

Technical view for GBPUSD

The GBPUSD pair gained sharply higher after making bottom near 1.28 in first week of July. However, pair failed to cross strong resistance of 1.3550 and corrected sharply below 1.3150 levels. Technically, the pair is still trading under pressure and it is expected to resume its downtrend to retest previous low off 1.2800. However, unexpected move above 1.3550 will negate our bearish view and pair will set inverted head and shoulder pattern targets, which could take it towards 1.3850-1.3900 zone. Hence, for this week recommendation would be to sell on rallies upto 1.3350 with stoploss above 1.3550(closing basis) for downside target of 1.2950-1.2900.

 

USDJPY

In the start of the week USDJPY moved higher because of a stunning electoral victory by Japanese Prime Minister Shinzo Abe's Liberal Democrats in an important upper-house election over the weekend reinforced the notion that the Bank of Japan will further expand its monetary easing efforts at a policy meeting later this month. Also, there is a speculation that Japan was considering an unorthodox monetary stimulus measure known as helicopter money, stoked by reports that former Fed Chairman Ben Bernanke had met with high-ranking Japanese officials in Tokyo. The pair ended the week at 104.89 with a gain of 4.32% after touching the 106 range. The dollar rose to a three-week high against the yen and set a biggest weekly gain against the Japanese currency in 17 years after strong U.S. and Chinese economic data diminished the appetite for the yen as a haven from risk. There are no major data from Japan in the coming week, thus market participation will be taking cues from the ECB interest rate decision which is due on Thursday.

 

Technical view for USDJPY

USDJPY posted a remarkable gain of 4.65% or moved higher by more than 460 pips in the previous week. The pair has formed a bullish engulfing pattern on the weekly chart and closed on a positive note. This indicates that short term bottom is in place and the trend has changed from bearish to bullish. The pair has found the resistance near 106 levels and trying to retrace back, thus we might see some correction in the coming week. However, medium term remains bullish. Hence, it is advisable to buy on dips towards 103.50-104 zones with potential upside target of 107-107.50 levels. On the downside, immediate support is located around 103.50 levels.

 

AUDUSD

Australian dollar made a 10-week high of 0.7676 in the last week against the US dollar after the growth in the world second largest economy china by 6.7% (YOY), slightly better than estimates of 6.6%. Being Australia's largest trading partner, Chinese growth expansion can have a positive correlation for the nation's economy. This can in turn cause the Reserve Bank of Australia to take action to favor a less accommodative monetary policy stance in order to subdue inflation as more capital flows between the countries. However, on Friday, the pair did not persist at higher levels and erased some gains as the US dollar rallied on better-than-expected US data. Considering good US retail numbers and increase in probability of Dec rate hike could strengthen the dollar against its counter pairs. Moving ahead, market participants will keep an eye on NAB Quarterly Business confidence to gauge the view on Australian dollar.

 

Technical view for AUDUSD

In the previous week, pair made a high of 0.7676 followed by a correction on Friday and formed an indecisive bar on the weekly chart. On daily chart, momentum oscillator Relative strength index and stochastic exhibits the negative divergence. This indicates that momentum on the upside has reduced and there is a high probability of a reversal on the downside in near term. Thus, as long as the pair is capped below the immediate resistance zone of 0.7600-0.7650, we expect a correction towards 0.7450 level.

 

USDCAD

A decline in USD/CAD in the previous week started with a strong recovery in Oil prices and strength in the Canadian dollar after the BoC monetary policy report. The BoC held its interest rate at 0.5% last week, where it has stood since last summer. Policymakers also trimmed their growth forecast for the next three years. Drawdown in crude oil inventory and bad numbers by manufacturing sales, decline for the third time in five months had extended losses in the USDCAD, however in the last trading session, the pair bounced back amid dollar strength because of good US retail sales and IIP number which was better than expected. In the coming week, events are Core CPI and Core retail sales. The Core CPI edged up to 0.3% in May, matching the forecast. The markets are expecting a dip in the June release, with an estimate of 0.0%. The Core Retail sales have impressed in April with a gain of 1.3%, well above the estimate of 0.7%. The markets are expecting a small gain of 0.3% in the May release.

 

Technical view for USDCAD

In the previous week, USDCAD tested the strong resistance of 1.3140 and gave breakout on the upside to trap bullish traders. However, it corrected below 1.2900 before closing the week at 1.2970. On daily chart, USDCAD is moving in a symmetrical triangle pattern from the last two months. In the coming week, if the pair gives pattern breakout on downside which comes near 1.2800 level, then it would resume the major downtrend and it could move lower towards 1.2600 level. However, failure to do would force the pair to move in the range of 1.2800-1.3140.