Daily analysis 26.07.2013

The EUR/USD moved toward 1.33 after the dollar weakened to the yen and comments from Hon Hilsenrath on possible Fed's forward guidance review. Discussions on future Fed's chief. Selective approach toward EM from Oppenheimer Currency Opportunities Fund. The zloty gained on stronger EUR/USD.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 15.55 CET: University of Michigan Confidence (survey: 84 points)

Close to the 1.33 level. Federal Reserve. Another Fed's chairman

An the end of US session we had quite bold upside move on the EUR/USD. It was partly caused by USD/JPY slide (yen strength) before the inflation data and technical level (99.50). Another reason which could generated a bullish move on the most heavily traded pair could come from Jon Hisenrath article in the “WSJ”. The author is suggesting that the next week FOMC meeting can modify the forward guidance. The Fed claims that it will not increase the interest rates unless the unemployment drops to 6.5% or future inflation rise over 2.5%. However, the recent statements from Bernanke were suggesting that the current unemployment can paint too optimistic picture on jobs because many people are underemployed, so there can be a room to move the objective lower. Hilsenrath also notes that the Federal Reserve can change its guidance on inflation. He writes that “One option is to say that short-term rates won't rise if inflation falls below some threshold, perhaps 1.5%. Similar idea presented Morgan Stanley today. It claims that “FOMC may strengthen its forward guidance, lowering unemployment target and adding lower-bound inflation threshold”. The Fed's news is undoubtedly bearish for the dollar and it increases the odds that the EUR/USD can move higher before the Federal Reserve meeting.

Yesterday I was suggesting to read the “WSJ” article on two most probable candidates for the FOMC chair – Janet Yellen and Lawrence Summers. The latter is described as a “Obama administration insider” and have been closely connected to the White House for years. On the other hand Yellen is “a Fed insider” with well established contacts in the Central Bankers community and deep knowledge on the current unconventional monetary policy. However, after a few hours another article hit the wires on the Fed's next chairman. “WSJ” described a letter to Barack Obama singed by 54 Democratic Senators which gave support to Ms. Yellen. What is more interesting Senators are not concerned on the monetary policy but rather “about Mr Summers's view on financial regulation”. Tom Harkin (D., Iowa), cited by the “WSJ” said that “He was one of the architects of getting rid of Glass-Steagall, of getting rid of other regulations”. The case is getting more complex and should not be currently the main topic which shapes the currencies

Summarizing the dollar is again under pressure on longer then previously expected expansionary monetary policy. The opening of the next week can be over 1.3300 and the bullishness on the EUR/USD can last at least till Wednesday.

Correction on the zloty.

The correction of recent EUR/PLN slides was not able to exceed 4.25 level and at the end of US session the zloty came back to the appreciation trend (in line with the EUR/USD rise. I don't expect, however, that we can slide toward 4.20 today. However, if the market opens pretty high on Monday and a “game” on more dovish Fed will continue, then we can expect EUR/PLN to retest the 4.20 level.

Portfolio manager from Oppenheimer Currency Opportunities Fund Alessio de Longis told the Wall Street Journal that it is worth to differentiate the EM. He prefers to invest in Mexican peso and Polish zloty noting that strong fundamentals of the mentioned currencies and the end of monetary easing (in Poland). On the other hand Longis “is keeping his distance from higher-yielding currencies whose economies rely heavily on foreign capital inflows to fund their wide current account deficits, such as the Turkish lira, Indian rupee and South African rand”.

Taking into the account the expectations for more dovishness from Fed we can expect more gains on the zloty next week. Also the data from the US will be crucial – GDP and NFP.

Expected levels of PLN according to the EUR/USD rate

Expected GBP/PLN levels according to the GBP/PLN rate.

The EUR/USD is still bullish. All Polish pairs are in bearish trends.

Technical analysis EUR/USD:the bullish positions are still preferred. Yesterday we almost touched the target/resistance at 1.3300. The next target is 1.34 (quite strong). Alternatively the slide under 1.3080-50 prefers the shorts.

Technical analysis EUR/PLN: we have reached the first target around 4.22. If the strong support around 4.20-4.22 is broken then the EUR/PLN can slump even toward 4.10-4.13. Alternatively the rise over 4.28 is a buy signal.

Technical analysis USD/PLN: A fall under 3.28 was a sell signal. The USD/PLN target at 3.18-3.14 is almost reached. The next one is around 3.05. A comeback above 3.26 again favors bulls.

Technical analysis CHF/PLN:the first target was reached at 3.42. The strong support is around 3.40. If it falls under 3.40 the next target is around 3.33. Alternatively a rise over 3.48 is a buy singal .

Technical analysis GBP/PLN: the sell signal was generated after sliding under 4.97 with a target around 4.9 and in extension even toward 4.8. Alternatively a rise over 5.04 is an indication of bulls' return.