British Pound, Euro Continue Underperformance Ahead of BoE, ECB

Same old story on Thursday: the European currencies (the British Pound, the Euro, and the Swiss Franc) lead the majors to the downside ahead of the crucial rate decisions out of the Bank of England and the European Central Bank today (of note: the CHF has shared a +0.91 daily correlation with the EUR since September 6, 2011, the day the Swiss National Bank implemented the EURCHF exchange rate floor at 1.2000).

Expectations for the Bank of England to ease further are riding high, with the consensus survey provided by Bloomberg News showing that economists forecast that the Asset Purchase Program target will be raised to £375 billion from £325 billion. All the while, the key interest rate should remain unchanged at 0.50 percent, where it has been on hold since March 2009. Ultimately, we expect the Bank of England to cave and ease more, as there are few other viable options at this point in time.

The Euro-zone Summit yielded the results that the European Central Bank has longed to see: political leaders coming together to implement a plan that will stem the crisis. However, any help from the fiscal side of the growth equation looks to be limited, and the European Central Bank is essentially having its hand forced to implement new measures to help control the spread of the crisis from the periphery into the core. This month's European Central Bank rate decision will reveal this: if the European Central Bank cuts rates, it thus believes politicians have done enough to warrant further help from monetary officials; if the European Central Bank does not change its policies, then it is a sign that the European Central Bank believes more needs to be done by political leaders. A rate cut will be supportive of a stronger Euro – just like how the July 2011 rate hike was deconstructive.

RELATIVE PERFORMANCE (versus USD): 10:40 GMT

JPY: +0.20%

AUD: +0.01%

NZD: +/-0.00%

CAD: -0.05%

GBP: -0.17%

EUR: -0.18%

CHF: -0.20%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.01%

ECONOMIC CALENDAR

Aside from the Bank of England and the European Central Bank rate decisions, there is the ADP Employment Change report out of the United States that should serve as a preview for tomorrow's Nonfarm Payrolls report, released at 08:15 EDT / 12:15 GMT. Later, at 10:00 EDT / 14:00 GMT, the ISM Non-Manufacturing Composite for June will be released.

TECHNICAL OUTLOOK

EURUSD: The EURUSD's consolidation and failure to set fresh highs in the wake of the Euro-zone Summit play into the Symmetrical Triangle on the daily chart. For now, we are looking for a pullback towards 1.2440/80 before the direction of the triangle is determined. Resistance to the upside comes in at 1.2700/15 (Bollinger Band, 50-DMA), and a break above suggests a test of 1.2745/50 (June high) then 1.2820. Triangle support comes in at 1.2480, 1.2440, and a move lower points to 1.2405/20. A close below 1.2405/20 on the 4-hour chart implies a move towards 1.2285/90 (yearly low).

USDJPY: The USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low, with the neckline coming in at 80.60/70. Only a daily close above this level will signal the commencement of this pattern. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term support comes in at 78.90/95 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: The GBPUSD's failure to achieve new highs in the post-Euro-zone Summit world draws into question the underlying strength of the Sterling, and the suggestion is that diverging monetary policies between the Bank of England and the Federal Reserve (with the Bank of England increasingly dovish and the Federal Reserve in wait-and-see mode) are hurting the pair. Fresh weekly lows were set today at 1.5566, suggesting further losses ahead. Resistance comes in at 1.5600/05 (20-DMA) then the weekly high at 1.5720/25. Near-term support lies at 1.5480/90 (last week's low, Bollinger Band).

AUDUSD: The AUDUSD has put in a lower high thus far today. The two consecutive closes above the 100-DMA give scope for a move higher towards 1.0365/85, but with hourly charts indicating a Rounding Top, a pullback may be warranted first. Near-term support comes in at 1.0250/60 (200-DMA, 100-DMA) and then the weekly low at 1.0210/15. A move below would signal an intraweek reversal and signal further losses.

--- Written by Christopher Vecchio, Currency Analyst

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