FX - China CPI Comes in Softer Than Expected; Helps to Prop Risk Sentiment

The broad based USD rally has stalled out for now, with most of the major currencies finding some support ahead of the latest minor bounce. At this point it is too early to tell whether we are seeing some consolidation ahead of the next upside extension in favor of the buck, or whether this is the start to a fresh round of USD selling. All has been very quiet since the North American close after Monday’s lackluster economic calendar produced the same kind of trade.

The main developments in recent hours come from Australia, China and Japan, although none of these developments has been a big market mover. In Australia, the RBA has come out with the Minutes to the latest policy meeting which are consistent with a less hawkish tone as the central bank is willing to wait a few months to assess the impact of the floods before deciding whether to continue with its tightening cycle. Meanwhile, in China, we have seen a batch of inflation data released with the main takeaway coming from a softer than expected CPI reading which has helped to bolster risk appetite and mitigate any weakness in the Australian Dollar resulting from the RBA Minutes (it is however worth noting that China PPI came in a good deal higher than expected). Finally, the Bank of Japan came out with an as expected unchanged policy decision that hardly factored into price action, although the central bank did manage to raise its economic assessment.

Looking ahead, German GDP (0.5% expected) is due at 7:00GMT, followed by UK CPI (0.1% expected), DCLG house prices (2.8% expected), and the retail price index (0.2% expected) due at 9:30GMT. Eurozone GDP (0.4% expected), ZEW (28.5 expected) and trade balance (1.1B expected) are all then due out at 10:00GMT, along with German ZEW (83.0 expected). US equity futures are tracking slightly lower, while commodities are moving in the opposite direction and are showing mildly bid.

TECHNICAL OUTLOOK

EUR/USD:The latest rallies have stalled out well ahead of 1.3860 with the market finding some resistance by an ideal right shoulder top in the mid-1.3700’s ahead of the latest sharp setbacks. From here, the risks are tilted to the downside, with Friday’s break and close back below 1.3570 triggering the H&S topping formation and opening the door for a fresh downside extension towards the 1.3200 area over the coming days. Any rallies should continue to be well capped ahead of 1.3700 with only a break back above the figure to give reason for concern.

USD/JPY: The market continues to remain extremely well bid on dips below 82.00, with the latest surge back above 83.00 really encouraging longer-term recovery prospects and opening the door for a potential break of key topside resistance by 84.50 over the coming days. Longer-term cyclical studies certainly suggest that the market could be poised for a major bullish reversal and we would look for a break and weekly close back above 84.50 to help confirm outlook. A break back below 82.00 would concern, while ultimately, only a back below 81.00 would negate.

GBP/USD: The market looks to have once again found a meaningful top by the 1.6300 barrier, with the latest setbacks resulting in a series of daily lower tops. From here we look for a break and close back below 1.6000 to confirm bias and accelerate declines back towards 1.5750 over the coming sessions. A daily close back above 1.6200 would give reason for concern, while ultimately only back above 1.6300 negates.

USD/CHF: Although the longer-term market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Next key topside barriers come in by 0.9785 and we now look for a weekly close above this level to accelerate gains and open a fresh upside extension back above parity and towards 1.0070 medium-term resistance from December 2010. Any setbacks from here are expected to be well supported ahead of 0.9500.

Written by Joel Kruger, Technical Currency Strategist

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