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Bernanke and Moody's comments send the dollar spinning

CMC Markets

This week’s currency rollercoaster has taken a number of new twists in the last twelve hours starting with Fed chairman Ben Bernanke appearing to give the impression that further QE was on the table, if the economy continued to show weakness, while Moody’s shone a light on the US’s own debt problems with a downgrade warning.

Putting to one side for the moment that the last lot of stimulus appears to have been less than successful, given last weeks payroll numbers, the market reaction may well have been slightly overdone given the probable obstacles to such a measure, notwithstanding the hostile global reaction in light of last years protests from China and Brazil. Splits on the committee won’t help his cause either with Fisher one of a few opposed to further QE.

In a separate development last nights move by Moody’s in placing the US AAA rating on notice for a downgrade sent a cruise missile across the bows of US politicians with respect to the current stalemate between Democrats and Republicans in striving to arrive at an agreement to raise the debt ceiling.

The note stated that “the review of the US government\'s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default”. One thing is certain it won’t take long for Fitch and S&P to follow suit if the politicians don’t come to their senses.

Coming on the heels as it did of another ratings downgrade of Greece by Fitch by three notches, currency traders could be forgiven for a classic case of whiplash.

Today’s focus is likely to be back on Europe with Eurozone CPI likely to be a sideshow to today’s series of Italian bond auctions, and highlighting the folly of last week’s decision by the ECB to raise interest rates.

In US data out later this afternoon retail sales for June are expected to be flat, a slight improvement in May’s 0.2% decline, while weekly jobless claims are expected to fall back to 410k from last weeks better than expected 418k number.

In signs that inflation still remains a problem outside the Fed’s bubble PPI for June is expected to remain constant at an annualised 7.3%.

 

EURUSD – the strong rebound in the last 24 hours has seen the single currency return to the scene of the original triangle breakout at 1.4190, which saw the original fall to 1.3840. The failure of this level to hold throws the recent downtrend and negative sentiment into doubt. The return inside the original triangle, above 1.4200 now looks to test the 100 day MA which had acted as support for such a long time at 1.4290 as well as resistance at the 55 day MA at 1.4360.

Support now comes in around 1.4050, a break of which would then retarget the 200 day MA at 1.3910.

The primary trend line support at 1.3725 from the June 2010 lows at 1.1880 is the major uptrend line for the current rise in the single currency.

 

GBPUSD – as is always the way with the pound we got the obligatory short squeeze breaking back above the 200 day MA at 1.6050, and through to the larger resistance at 1.6120/30 which has so far rebuffed any further advances.

The last two daily candles do seem to demonstrate some bullish price action.

Even allowing for that though, only a move beyond 1.6260, trend line resistance from the April highs, would diminish the downward pressure currently in place.

The expectation is for the current rebound to fizzle out and re-test the 1.5880 area which is the 61.8% retracement of the 1.5340/1.6745 up move.

 

EURGBP – yesterday’s price action saw the single currency fail at the first resistance of 0.8850 mentioned in Tuesday’s note. While below this 0.8850 resistance the expectation is for the euro to fall back towards the trend line support at 0.8740 from the February lows at 0.8410.

Last weeks bearish weekly reversal signal continues to provide the bias for further weakness on a break of the June lows at 0.8725 which could well prompt further losses towards the 200 day MA at 0.8665.

Above yesterday’s highs at 0.8850 could well target a move towards the 0.8940 area.

 

USDJPY – the current weakness in the US dollar is not likely to play well with Japanese authorities and could make the current weakness extremely nervy and choppy.

Nevertheless while below the May lows at 79.50 the emphasis remains firmly to the downside. Only a break above 79.80 could well spark a sharp move higher through 80.

The next support lies around this weeks lows around 78.50, while a break below could well target the all-time lows at 76.50.