British Pound Rallies After King’s Comments; Euro Falls as Spanish Yields Rise

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By Christopher Vecchio, DailyFX Currency Analyst

The British Pound was relatively firmer all morning but surged across the board on some inauspicious comments by Bank of England Governor Mervyn King. The head of the Bank of England not only noted that the British economy remains particularly weak, but also that he believed that a rate cut would be counterproductive. This was enough to send the British Pound higher: market participants care more that the head of a major central bank dismissed a policy stance that typically results in a weaker currency than the notion that the Bank of England would do whatever it could to help the British economy.

Meanwhile, the Euro is underperforming across the board this morning as pressures have started to rise once again in peripheral European bond markets (though we suspect this is some residual profit taking following the massive rally last week). The Italian 2-year note yield has climbed to 3.240% (+10.8-bps) while the Spanish 2-year note yield has risen to 3.829% (+28.9-bps). Similarly, the Italian 10-year note yield has dipped to 5.928% (-0.6-bps) while the Spanish 10-year note yield has moved higher to 6.852% (+7.3-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:50 GMT

JPY: +0.37%

GBP:+0.24%

AUD:+0.10%

CAD:+0.03%

NZD:-0.13%

CHF:-0.30%

EUR: -0.31%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.18% (-0.77% past 5-days)

ECONOMIC CALENDAR

The docket is exceptionally thin today, with no major events due out during the remainder of the European trading session and none during the entirety of the North American trading session. Instead, our focus lies in data releases due out in early-Asia on Thursday.

TECHNICAL OUTLOOK

EURUSD:

The pair has broken yesterday's lows and is gunning for the weekly low at 1.2341; a move below the opening range set on Monday would signal further losses. Yesterday's Inside Day also was a Doji, and after a three wave correction off of the July 24 low, it appears more losses may be lining up (an Inside Day as well as a Doji after a corrective uptrend has the potential to signal a turn). Nonetheless, with major levels holding, our outlook is little changed from Monday. The recent failure above 1.2400 is critical, considering the potential for an Inverse Head & Shoulders off the bottom. With the Head at 1.2040/45 and the Neckline at 1.2400/05, the measured move for this potential reversal would be 1.2760. We will respect this on a daily close above 1.2400/05. Near-term resistance comes in at 1.2400/05, 1.2440/45, and 1.2495/1.2505. Daily support comes in at 1.2310/30, 1.2200/20, and 1.2155/70.

USDJPY:

A pattern long in the making, the USDJPY Inverse Head & Shoulder formation that has been in wait-and-see mode remains valid so long as the Head at 77.60/70 holds. Indeed, it has, and after the Fed meeting and the July Nonfarm Payrolls last week, the USDJPY is constructive in the neat-term, fundamentally. Accordingly, with the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.10/15 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. On the hourly charts, it appears a rounded bottom is forming, and we are thus biased higher for now.

GBPUSD:

Price action has been sideways for the past three-days, leaving our outlook unchanged from Monday. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5565/85 (20-DMA, 50-DMA) would be bearish, whereas a close below 1.5490/1.5520 would be very bearish (as it would represent a break of the channel as well as last week's lows). Daily resistance is 1.5565/85, 1.5600/05 (10-DMA), and 1.5625/40. Near-term support is 1.5490/1.5520 then 1.5450/60 (July 25 low).

AUDUSD:

The AUDUSD continues to push its ascending channel trendline, moving as high as 1.0603 yesterday. However, prices have broken to the downside and the weekly lows set on Monday have been broken; the break of the weekly opening range to the downside signals more losses. The 4-hour RSI found support 50, suggesting that the uptrend is very much still intact; any further declines will need a fundamental catalyst; this is very plausible with significant Australian and Chinese event risk on the horizon. Near-term resistance comes in at 1.0580 (August high), 1.0600/05 and 1.0630. Support comes in at 1.0535/45 (former swing highs), 1.0480, 1.0435/45, and 1.0380/85.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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