The FX markets start the week in quiet fashion. Important data/event will drive the markets in the second half of the week; the US will be in the center of attention with second quarter GDP estimate and the FOMC decision on Wednesday, followed by July nonfarm payrolls and unemployment rate on Friday. The US 10-year government yields start the week below 2.50%, while DXY index consolidates at the highest levels over a month. While USD gives signs of recovery, the reluctance in US yields remains highly contingent on FOMC’s tenor. The Fed is expected to reduce its bond purchases by additional 10bn dollars per month, down to USD 25bn dollars.
According to implied probabilities extracted by Fed funds futures pricing, the probability of the first rate hike remains subdued until the second quarter of 2014. The Fed dots will be closely monitored to follow the hawk-dove dynamics in the heart of the FOMC.
Sharp increase in EUR-shorts
CFTC data showed an aggressive increase in EUR-short future positions through the week to July 22nd. The net speculative shorts confirm the negative sentiment in EUR, yet also increase the risk of a bullish reversal in case of setback in market sentiment. The EUR/USD path will mostly depend on data this week. Besides US data, the Euro-zone inflation and unemployment should be closely monitored. The CPI estimate for July is due on Thursday (July 31st) and will likely remain soft (CPI y/y seen at 0.5%, core CPI y/y at 0.8%). The real returns in EUR-denominated assets are still interesting due to low inflation dynamics. There is good demand in Euro-zone periphery bonds at the start of the week (except Portugal) as the ECB stimulus package continue pushing the most indebted countries’ yields lower. We expect EUR to remain ranged at the first half of the week. In EUR/USD, bids remain solid at 1.3400+, while offers line up above 1.3550 (July 21st high). Decent option related offers wait to be activated at 1.3400 for the week ahead, suggesting deeper downside correction in case of a negative breakout below 1.3400. The key support is set at 1.3296 (November 7th 2013 low). Traders should however be aware of the risk of a short-term bullish reversal due the oversold conditions in EUR/USD (RSI at 28%) and deeply short EUR speculative positions. In this context, offers are expected to limit rallies at 1.3565/91 (21/50 dma) region given the deep mid-run bearish sentiment. EUR/GBP trades comfortably in the mid-range of June-July downtrend band (0.78673/0.79633). The overall bias remains bearish as long as resistance at 0.79330/0.79633 (21-dma / downtrend channel top) holds.
Loonie in the bullish consolidation zone
The broad based USD strength helped USD/CAD clearing resistance at 1.0800 last Frida0; the pair consolidates gains in the bullish consolidation zone. The key resistance stands at the 200-dma (1.0832), while support is building at 1.0789/1.0800 (21-dma / optionality). The direction is mostly dependent on global USD appetite and the Canadian GDP report (due on Friday). The second half of the week should thus bring more clarity for short-term direction. We remain in the sidelines and closely monitor the 200-dma threshold, a significant break above suggests deeper upside correction.