Forex Analysis & Today's Strategy EURGBP 9 July 08

USD stronger yesterday on equity recovery and oil price drop, but falls out of bed this morning on Iran worries. Ugly streak of data out of Australia continues - employment data is up tonight. AUDUSD unable to hold lower… Overnight News Bullets § AU NAB Business Conditions, Jun, out at 0 vs 7 prior. § AU NAB Business Confidence, Jun, out -9 vs -4 prior. § JN Bankruptcies YoY, Jun, out at 11.7% vs -1.5% prior. § UK GCLG UK House Prices YoY, May, out at 3.7% vs 3.3% exp. Prior 4.9% § US Pending Home Sales MoM, May, out at -4.7% vs -3.0% exp. Prior 7.1% § US Wholesale Inventories, May, out at 0.8% vs 0.6% exp. Prior 1.4% § US Consumer Credit, May, out at $7.8B vs $7.5B exp. Prior 7.8B O/N Data Heat map: EU US JP UK SZ AU CA NZ NO SE FR - + Calendar Today's Highlights: Time (GMT) Region Release Consensus 07:30 SE Industrial Production MoM/YoY (May) 0.2%/0.8% 08:30 UK Total Trade Balance (May) -£4200 09:00 E-Z Euro-Zone GDP QoQ/YoY (1Q F) 0.8%/2.2% 11:00 US MBA Mortgage Applications (Jul 4) 3.6% - Prior 12:15 CA Housing Starts (Jun) 216.0K 14:35 US DOE U.S. Crude Oil Inventories (Jul 4) -2100K 23:50 JN Domestic CGPI MoM/YoY (Jun) 0.6%/5.3% 23:50 JN Trade Balance – BOP Basis (May) Y500.0B This and Next Week’s Highlights: Date Region Release Jul 10 SW CPI, AMS Unemployment Jul 10 NO Producer Prices, CPI Jul 10 UK BoE Announces Rates Jul 10 US Initial Jobless Claims, Continuing Claims, ICSC Chain Store Sales Jul 11 EC Euro-Zone OECD Leadig Ind. Jul 11 CA Unemployment Rate, Net Change in Employment, Int’l Merchandise Trade, New Housing Price Index Jul 11 US Import Price Index, U. of Michigan Confidence, Monthly Budget Statement What's going on? § In overnight trading, Asian stocks have surged with biggest gains in nearly 3-month period. Drop in oil prices as well as JPMorgan Chase CEO’s comments on the easing of credit-market losses have pushed the banking and industrial stocks higher. § Crude oil prices have fallen to near 2-wk lows as Iran has downplayed the possibility of a war and dollar strength has reduced the appeal of oil as an inflationary hedge. § With his speech yesterday focusing on Fed extending the duration of lending facilities to primary dealers, Chairman Bernanke was seen to ease the credit concerns only a day after a record drop in Fannie Mae and Freddie Mac refueled concerns of deepening credit concerns. FX EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN - - - + FX Trading Strategies Pair Supp. Resis. Comments EURGBP 0.7870 0.8035 The GBP has been under pressure the last couple of months an we see the scenario continue, favoring the EUR relatively on rate diffs. We buy at 0.7967 bid, stop offer at 0.7952, targeting 0.8050 and then to new highs. Also favorable buying on dips. MAJOR HEADLINES – PREVIOUS SESSION § US ABC Weekly Consumer Confidence rises to -41 vs. -43 expected and -43 last week § UK Jun. Nationwide Consumer Confidence fell to 63 vs. 65 expected and 69 in May § Japan May Machine Orders out at 5.1% YoY vs. -3.7% expected § Australia Jul. Westpac Confidence fell -6.7% vs. -5.6% in Jun. § Australia May Home Loans fell -7.9% vs. -2.0% expected § Germany May Trade Balance out at 14.4B vs. 17.3B expected. § Japan Jun. Machine Tool Orders out at -2.7% MoM. THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) § Sweden May Industrial Production/Orders (0730) § UK May Visible Trade Balance (0830) § UK BRC Shop Price Index (0930) § Australia RBA Governor Stevens to speak (1120) § Canada Jun. Housing Starts (1215) § US Weekly Crude Oil and Product Inventories (1435) § Japan Jun. Domestic CGPI (2350) § Japan May Current Account (2350) § New Zealand Business PMI (0000) § Australia Jun. Employment Change and Unemployment Rate (0130) Market Comments The currency world was reminded about an old bugaboo early this morning - geopolitical risk - which has caused plenty of volatility in markets past, but which hasn't been much of a factor over the last couple of years. In this case, we're talking about Iran's test firing of a long range missile this morning that generated noticeable moves across markets. It seems the rumblings lately related to a potential US or Israeli confrontation with Iran over its nuclear program are generating enough concern to start hitting financial markets when actual events make headlines. The reactions in the market in these kinds of situations almost always turn out to be far more exaggerated than is justified by the implications of the actual events, but geopolitical risk stories can drive significant short term volatility and the prospect of any outright attack on Iran conjures up endless fears of the affect on oil prices and a wider contagion in the region, so it's certainly a story worth following and protecting a portfolio against. Yesterday, the focus was on the huge drop in oil prices, which were down over 5 dollars at times and helped drive an equity market recovery and boost USD sentiment a bit, though not convincingly enough to take out key technical levels. The JPY and CHF stayed on the weak side, as it seems when risk aversion is high, the market sells these currencies on strong commodity prices and when risk aversion is low, the market sells these currencies on positive equity markets...clearly a narrative thread that defies logic... We continue, in other words, to shake our heads at the reaction patterns in these currencies to intermarket moves. Iran worries aside, the USD remains in no man's land and the outlook is beginning to lean a bit to the bearish side for the greenback with the inability of very positive USD news (especially oil and the recent negative EuroZone data) to drive a more convincing move in USD strength. Still, momentum is entirely absent in the shortest term and we look for breakouts to drive more directional technical interest. If EURUSD 1.5750/1.5800 falls again, we may have a test of 1.6000+ on our hands. 1.5600 needs a break to the downside to create more convincing bearish technicals. Watch out for oil market volatility on this week's supplies figures. The march of negative Australian data continued overnight with a sharp drop in consumer confidence and home loans data. Tonight we see the Australian June employment report, as unemployment is finally showing signs of bottoming out down under in recent months. Still, the inability of AUDUSD to hold below the 0.9500 level overnight on yet another series of bad data points is another bearish USD sign. The 55-day moving average comes in around 0.9500 and a strong close below that level is needed for bears to gain some encouragement in this pair. AUD looks weaker elsewhere. UK data also continues to show problems and it looks like EURGBP could be ready for another go at the 0.8000 level and beyond today, barring positive surprises from today's UK data. Chart: EURUSD The pair has failed to follow through lower after the initial excitement generated by the lack of ECB guidance last Thursday. This, plus USD positive news that has failed to see the greenback stronger could mean that the risks are tilting back to the upside, though the pair is in a bit of technical limbo in this area. The weekly pivot and high for the week at 1.5750 is the first line in the sand to the upside, followed by the upside swing level coming in around 1.5800. If these two levels give way, then it dramatically raises the odds for an eventual test at 1.6000 and beyond. To the downside, the 1.5610/00 area is key for confirming the recent reversal and setting up a test to the low of the old range.

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