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EUR/USD, GBP/USD Daily Forex Commentary July 5, 2012

The EUR/USD has made its second push down from the highs for another run of over 100 pips. The slight bias for the short over the last couple days has proven to be the correct direction for the trade. However entries have been elusive. I did manage to catch the GBP/USD short on Tuesday but expecting the larger run I walked away from the computer with my take profit set at the 90 pip range tool and got taken out break even.

I will only be looking for the short today as the 3rd push today is the highest probability trade. The first place I will look to see the trap move will be the highs created after London closed yesterday but I doubt there will be much resistance there since the US was closed yesterday. The preferred level will be the area around 1.2560 which is where the 15min and hourly 200emas are hitting at the same time and coincides with the lows from Tuesday.

The GBP/USD has seen its first long term push down breaking out of the 3rd push chop over the last few days and today I will expect the 2nd. With the GBP being the stronger pair between the two there could be a deeper pullback to the upside. It also has its 15min and 1hr 200emas that are close and thats where I will start to look for the trap move today on this pair.

Forex News Today

We have one busy day ahead for news guys. The potential for volatility is high. Most of it is after the live training room is closed so we should be able to get a nice trade running before the market gets too crazy.

We start with Halifax HPI from the UK which could produce some opportunity for manipulation but I expect the market to be more focused on the 10yr bond auctions from France and Spain. These will be watched very close. Mainly Spain. Remember they havent yet established when the ESM will actually give the bailout money and Merkel did say that Germany wouldnt approve the banks getting bailed out without conditions. That leaves the ECB to prop up the markets and they havent been buying sovereign bonds for over a month now. At this point I am thinking they dont want the exposure. On top of that is if we do see yields on French bonds start to rise then it will be seen as the crisis getting more to the core countries of Europe and could be bad. The chance for this happening is slim right now I think but that dont mean that Spain wont take a hammering today.

Then we have German Factory Orders expected to be 0.1. Any disappointment here and it will prove Germany is slowing and will be Euro negative. Every time we see that Germany is being effected by the recession the worse things will be for the Euro as the strongest economy that they are all looking to for support loses any ability to give any support.

Next is the UK Asset Purchases where they are expected to add 50 billion, Official bank rate and  MPC Rate Statement. I have my doubts they will be doing any surprises but the Statement will cause some volatility depending on the language used. I expect it will mostly be GBP negative

Then the ECB steps in with the Minimum Bid Rate where they are expected to cut by 25 basis points. There is potential for a surprise larger cut or a cut in the deposit rate but the ECB doesnt like to surprise the markets unless they are almost desperate. Of which they just may be. Later is the Press Conference and of course the market is always volatile during those.

The US had ADP Nonfarm Payroll in between the ECB rate announcement and Press conference but I have my doubts this will create too much movement unless its a large surprise. A miss of 30+K will probably cause some movement. Then later is Unemployment Claims and  ISM Non-Manufacturing PMI. If these are bad numbers then the Euro will do some retracement of any down move created by the ECB but they will have to be significant misses to the negative side.

A Little More on the Grand Plan and Merkels So Called Defeat

As I said in recent commentaries the Summit last week when Monti announced the win over Germany. The fat lady hasnt sung yet and Merkel just side stepped a little and now letting the other politicians have their say. Things dont look good for the Grand Plan. This is from an article on Zero Hedge highlighting the fact of not only is the CSU putting up a fight but so is Finland, Holland and Slovakia. Interesting to say the least.

  Those curious why peripheral European bond yields have once again resumed their levitation creep higher, it is because not only did yesterday the key Merkel coalition partner, CSU, threaten to leave Germany’s ruling party hanging “if further euro zone states secure bailouts, saying there were limits to how far his party was prepared to go”, but today we have gotten even more furious backtracking on Mario Monti’s history “success” less than a week earlier, after on one hand German opposition SPD has said it opposed Direct ESM aid to banks, but more importantly, the German Finance Ministry itself said that the entire bailout timeline is now in question, saying that it “remains unclear if Eurozone finance ministers will decide on Spain’s request for banking sector aid at their next monthly meeting on July 9.” The ministry also added that a decision could only come once the report on Spain by the troika – the European Commission, the ECB and the IMF – had been finalized. In other words, that much maligned Troika, which Monti had supposedly exorcised from intervening in the economies of Spain and Italy, will, after all be very much present, which also means that all the media spin about last week’s “gamechanging” and unconditional bailout summit resolution, has been for nothing, in line with all the skeptical expectations.

In other words, the European bailout mechanism may or may not be activated at some point in the future. But one thing is certain: even combined, assuming they are fully funded, and with recent opposition by Finland, Holland and Slovakia they won’t be, the ESM and EFSF, will certainly not have enough firepower to deal with both Spain and Italy, which means next on the regurgitated 2011 news agenda will be the same discussions that took place last year over levering up the EFSF, which like in 2011 will end up with the same sad conclusion. And during all this time, Europe will have finally run out of its last remaining assets, up to and including Spiderman towels.

Happy Trading


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