EUR/USD
Resistance at 1.4500 will look to cap the corrective recovery off 1.4395. Tuesday's weakness left Monday's 1.4580 high as a potential bull failure, and EUR bears will be looking to extend the setback below 1.4395 to test the important intraday higher low at 1.4325. A break below 1.4325 is required to confirm the bull failure at 1.4580. Regaining ground above 1.4500 would provide respite, but only above 1.4553 would re-open the 1.4580 high.
GBP/USD
Gyrates within a 1.6139/1.5993 range, as the near-term direction becomes uncertain once again. However, GBP bears would appear to have the upper hand, and are expected to defend the 1.6139 high. A push below 1.5993 would bring the focus back onto the late June reaction lows at 1.5911, threatening a downtrend extension to 1.5852 and towards the 1.5675 area. Only above 1.6139 would negate the bearish GBP outlook, opening 1.6225.
USD/JPY
Remains on course for more gains towards 81.50, despite the setback during Wednesday's Asian hours. While support at 80.73 holds, a return to Tuesday's high at 81.19 is expected, opening 81.27 and the resistance cluster between 81.40 and 81.50. Only below Monday's low at 80.54 would cause a technical breakdown, exposing the June 30 low at 80.26.
AUD/USD
The recovery off 1.0664 is on course for more gains to 1.0757 and the July 1 high at 1.0791. Keeping the important 1.0615 support level protected is behind this latest upwave, and the recent completion of a medium-term bull wedge keeps the underlying tone positive for AUD. A push through 1.0791 would open the May 11 lower high at 1.0890. Only a reversal below 1.0664 would negate the bullish AUD outlook.
FOREX FOCUS
Little is going to stop the pound from melting now. In short, concern over the U.K. economic recovery is about to intensify and speculation over further monetary easing is likely to increase while market support for other major currencies, such as the dollar and the euro, is about to rise. Britain's ruling coalition may be facing criticism about its fiscal discipline but recent data suggest that the impact of public spending cuts and tax increases may be even deeper than initially anticipated. Hopes that the economy will start to recover from sluggish growth of 0.5% in the first quarter have been dashed by recent figures, with economists predicting a slowdown to only 0.3% or less growth in the second quarter. The growing threat of public-sector strikes, as the government attempts to bring salaries and pensions more in line with the private sector, is only likely to undermine market sentiment, especially if the government is seen backing down on key issues that threaten fiscal reform. The fact that the global recovery is also faltering isn't helping the country's growth prospects, given the U.K.'s high dependence on exports. If anything, the resulting decline in global commodity prices is helping to quell fears of stagflation and could mean the Bank of England will be more comfortable introducing more monetary easing if needed. The latest purchasing managers' index for the country's service industries confirmed such a trend this week. Although the activity index proved stronger than expected, the pricing index fell quite markedly, suggesting that inflation pressures are subsiding and recent strong rises in the consumer price index will be reversed as expected. Although the service sector of the economy may have proved slightly more buoyant, the manufacturing and construction sectors remained very soft, reinforcing calls for more monetary easing through a second dose of quantitative easing, or QE2. In a global context, this is the last thing the pound needs. Although the U.S. recovery remains uncertain as well, the Fed has essentially ruled out another dose of quantitative easing and the prospects for the dollar are steadily improving. Similarly, the euro's recent gains against the pound have been subdued, given that the risk of a Greek debt default has remained high and investors have been very selective in their purchases of the single currency. However, hopes that tensions will subside while details of a second Greek bailout are negotiated over the next few months means that the euro could find some support. If so, then the pound could find itself facing a hot and unpleasant summer as yield differentials move against it and the euro and the dollar find more investor support at its expense.
EUROPE
The euro fell heavily in European trading hours as London traders took a grim view of news late Tuesday that a key ratings agency had downgraded Portuguese government bonds to junk status, with an interest-rate rise from China adding to the pressure as it hit risky bets across the board. After some respite in sleepy Asian trading conditions, the euro sank by as much as 0.9% from its highest point of the day against the dollar, to hit a low of $1.4335 by 1035 GMT. It made similar losses against the Swiss franc, sterling, and the yen. The 0.25 percentage-point interest-rate rise by the People's Bank of China has been expected for a while, but the timing was a surprise. It boosted demand for U.S. dollars and Swiss francs, in a typical flight to safe retreats, and also dented the Australian dollar, as traders bet that the Asian giant is engineering a steady slowdown. But the Aussie found support around $1.0669 against the greenback, after a 0.25% fall. The four-notch downgrade to Portugal by Moody's Investors Service Inc. was also, in many ways, no surprise. "[The ratings agencies] are lagging reactions and just adding to market volatility," said Pierre Lequeux, head of currency management at Aviva Investors. But it served as a warning that the euro-zone debt crisis doesn't end with Greece. "There was a feeling that once we get a second package for Greece, we can all move on and focus on the U.S. fiscal situation, laying the groundwork for a rally in the euro against the dollar. But this is a reminder that it's not just a Greece story, it's Portugal as well. Spanish and Italian yields are also rising," said Daragh Maher, a currencies analyst at Credit Agricole in London.
ASIA
The euro recovered slightly against the dollar in Asia Wednesday from overnight falls, but the gains were limited before the European Central Bank's policy-setting meeting Thursday and U.S. June jobs data due Friday. Fears of sovereign debt contagion in the eurozone were rekindled by Moody's Investors Service downgrading of Portugal's ratings, but traders in Tokyo refrained from making aggressive moves ahead of upcoming events. "The gains (in the euro) were within the scope of position adjustments ahead of this week's two major events," said Akira Hoshino, chief manager at the foreign exchange trading department of Bank of Tokyo-Mitsubishi UFJ. At 0450 GMT, the euro was at $1.4451 from $1.4426 late New York Tuesday, according to EBS via CQG. The dollar was at Y80.85 from Y81.10, while the euro was at Y116.84 from Y116.92. The U.K. pound was at $1.6080 from $1.6053. The dollar was at CHF0.8398 from CHF0.8408. Traders said a 25-basis point hike in key short-term interest rates by the ECB is almost certain and the focus is on whether the ECB chief will indicate further rate hikes later this year. MUFG's Hoshino said the ECB could "maintain a vigilant stance" on inflation, although the ECB probably won't clarify the timing of the next rate hike. Hoshino also noted there would be limited room for the euro to rally much, as he expects the pair to move in a $1.400 to $1.4500 range for the time being.
WORLD
The euro slid Tuesday after ratings agency Moody's downgraded Portugal to "junk" status, adding to deepening worries over the euro zone's financial health. Last week's optimism that the Greek debt crisis was moderating was also shaken this week when Moody's Investors Service and Standard & Poor's issued warnings. Moody's said banks that roll over Greek debt may face impairment charges and S&P said a French plan may put Greece in "selective default." "The sovereign debt crisis in Europe has not significantly diminished, even with the latest aid package to Greece. This will continue to keep pressure on the euro," said Bernard Baumohl, chief global economist with the Economic Outlook Group. "Given the continued weakness in the European economy, Portugal's finances remain under great stress," Baumohl added. The euro will likely remain weak over the next few months because of the perception that the European Union has essentially kicked the can down the road a bit further with respect to Greece, Baumohl said. Euro-zone finance ministers authorized the next EUR12 billion tranche of last year's European Union-International Monetary Fund bailout over the weekend, enabling Greece to make a debt payment later this month. Adding to the weight on the euro and other higher-yielding currencies, Moody's stated that China could be carrying significantly more troubled loans than first thought, stirring worries about Chinese economic growth. Yet the prospect of higher euro-zone interest rates may play in the single currency's favor later in the week, some traders said.
