Ongoing uncertainty keeps favouring Swiss franc

The US dollar found relief after last Wednesday’s news conference following the FOMC’s (Federal Open Market Committee) interest rate decision. The USD was supported by the FOMC’s confirmation of the termination of QE 2 at the end of June, as was originally intended.

Fed chairman Ben Bernanke further significantly reduced doubts on the possibility of a third round of QE when citing inflationary pressures as a reason for not engaging in further stimulus. The Fed however showed it remained ready to do anything should deflation crop up.

The Fed also lowered its growth forecast and raised unemployment rate forecasts for 2011. Comments from Mr Bernanke pointed towards a struggling economy, and he also added that some of these problems may keep featuring in 2012. During his speech he also acknowledged the difficult debt situation in the eurozone and acknowledged that this might threaten the global economy, if Greece were to default.

During the Q&A session, Mr Bernanke attempted to explain what the phrase “extended period” meant in practice, saying that it implied that it would take at least two or three meetings before the Fed would raise rates.

The EUR/USD currency pair dived lower to the day’s lows of 1.4341 after the Fed’s FOMC interest rate decision on June 22, earlier that day it had made daily highs at 1.4416. The euro remained volatile due to the situation in Greece, hitting lows of 1.4102 in the former part of this week. At the time of writing the EUR/USD is currently trading at 1.4263 – recovering some losses on hopes of a positive conclusion to this week’s Greek parliamentary vote.

Greece is struggling to have Parliament approve a new round of austerity measures, which has been made a pre-requisite for the release of another tranche of the first bailout.

In the meantime the US is also struggling to reach a deal to raise the $14.3 trillion debt limit on how much the US government can borrow. The US government hit the debt ceiling on May 16 and by suspending investments into federal retirement funds bought enough time to fix an August 2 deadline.

Technically this means that if no agreement is reached by that date the Treasury Department would be unable to settle government bills and thus also interest on the US debt. Republicans and Democrats have so far been unable to find common ground.

Data from the US released last Friday revised the final GDP figure for Q1 higher to 1.9 per cent from the previous reading of 1.8 per cent.

The ongoing uncertainty over the slowing global economic recovery gave the Swissie further support. The USD/CHF reached new record lows at around 0.8319, even the EUR/CHF delved lower hitting record lows at 1.1817, as the CHF strengthened. Throughout the month of June the Swiss franc is up an average of 3.71 per cent against the majors.

Final data out of the UK for Q1 GDP remained unrevised and on a quarter on quarter basis the UK economy grew by 0.5 per cent; the year on year figure disappointed as it was revised slightly lower to 1.6 per cent from the previous 1.8 per cent.

The June minutes for the BoE monetary policy meeting, released last week, struck an overall dovish tone, and most significantly it transpired that some members were in principal not against further QE – although in the end only one voter voted for further QE. The MPC voted 7-2 to keep rates on hold.

Analysts remain mostly bearish on the GBP. Against the USD the GBP has traded in the range of 1.5911 - 1.6012, and is up 0.14 per cent so far this week. Against the EUR the GBP has traded in the range of 0.8858 - 0.8966 and is down 0.84 per cent up to the time of writing.

On a weekly scenario, to the upside the GBP/USD is expected to find resistance at 1.6174/1.6380 while to the downside the pair is expected to find support at 1.5851/1.5733. The EUR/GBP should meet resistance at 0.8959/0.9037 while support lies at 0.8796/0.8712 for the current week. Chinese Prime Minister Wen Jiabao, during a four day trip to Europe, has expressed his support for the euro and Europe. He reiterated that China would remain a long term investor in European debt markets and he expressed confidence that Europe would be able to overcome this debt crisis.

Upcoming FX key events:
Today: German Unemployment Change & Retail Sales, EZ HICP flash Canadian GDP.
Tomorrow: German and EZ PMI Manufacturing, Eurozone unemployment, UK PMI Manufacturing and US ISM Manufacturing.

FX technical key points:
EUR/USD is bearish, target 1.40, key reversal point 1.4500.
EUR/GBP is bullish, target 0.9050, key reversal point 0.8650.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5750, key reversal point 1.6260.
USD/CHF is bearish, target 0.8200, key reversal point 0.90.
AUD/USD is neutral.
NZD/USD is neutral.

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Mr Muscat is senior trader at RTFX Ltd.