Daily Report: Risk Lifted by Bank Recapitalization Talk, Hit by Italy Downgrade. Markets Turn into Consolidation

Risk sentiments was given a strong boost overnight on talk of bank recapitalization plan in Europe. And that sent back above 1.33 level while giving DOW a strong rebound from intraday low of 10404 to close at 10808, up 153 pts. However, risk rebounds halted after Moody's cut Italy's credit rating by three notches after US markets closed. EUR/USD then hovers around 1.33 while Asian equities are generally soft. It looks like market has turned into consolidation and traders would wait for tomorrow's ECB press conference and Friday's US NFP before placing another bet.

EU Commissioner for Economic Affairs urged that "capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty". And, he noted that "there is an increasingly shared view that we need a concerted, coordinated approach in Europe" and there's "a sense of urgency among ministers and we need to move on". The message was taken by the markets a a sign that EU finance ministers are looking into ways to coordinate recapitalization of banks and other financial institutions.

Moody's downgraded Italy's credit rating for the first time in nearly two decades after US markets closed. The rating was cut three notches from Aa2 to A2, and assigned a negative outlook. Moody's noted that the "fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy". In addition, Moody's noted that "all but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings".

On the data front, UK BRC shop prices rose 2.7% yoy in September. Australian retail sales beat expectation by rising 0.6% mom in August. Eurozone PMI services and retail sales will be released later today, along with UK PMI services and Q2 GDP final in European session. ADP job report and ISM services will be the main focus in US session.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.0464; (P) 1.0561; (R1) 1.0610; 

With 4 hours MACD crossed below signal line, a temporary top is in place at 1.0656 in USD/CAD and intraday bias is turned neutral. Also, note mild bearish divergence condition in 4 hours MACD, 1.0656 might be a near term top too, ahead of 161.8% projection of 0.9406 to 1.0009 from 0.9725 at 1.0701. Below 1.0431 will bring deeper pull back to 4 hours 55 EMA (now at 1.0356) and below. Though, in that case, we'd expect strong support from 1.0142 to contain downside and bring another rise. Above 1.0656 will resume recent rise from 0.9406 towards 1.0803 medium term fibonacci level.

In the bigger picture, sustained trading above 55 weeks EMA affirms the case that whole down trend from 2009 high of 1.3063 has finished at 0.9406 on bullish convergence condition in weekly. Current rally from 0.9406 should now target 1.0851 resistance (38.2% retracement of 1.3063 to 0.9406 at 1.0803). Break there will extend the rebound to 61.8% retracement 1.1666 and above. On the downside, break of 1.0009 support is needed indicate completion of the rally from 0.9406. Otherwise, we'll stay bullish in USD/CAD. 

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.3211; (P) 1.3289 (R1) 1.3434; 

EUR/USD recovers after dipping to 1.3145 and the break of 1.3311 minor resistance suggests that a temporary low is in place. Intraday bias is turned neutral for some consolidations. But note that break of 1.3689 resistance is needed to signal short term bottoming. Otherwise, outlook will remain bearish. Below 1.3145 will target 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5387; (P) 1.5441; (R1) 1.5542; 

GBP/USD managed to hold above 1.5327 and the break of 1.5483 minor resistance suggests that consolidation from 1.5372 is possibly still in progress. Intraday bias is turned neutral for the moment. Stronger recovery might be seen to 1.5715 and above. But even in that case, upside should be limited by 38.2% retracement of 1.6618 to 1.5327 at 1.5820 and bring fall resumption eventually. Decisive break of 1.5327 will confirm resumption of recent fall from 1.6746 and should target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at 1.5055 next

In the bigger picture, rise from 1.4229, which is treated as the third leg of consolidation from 1.3503 (2008 low) should be finished at 1.6746 after GBP/USD completed a head and shoulder top reversal pattern (ls: 1.6298, h: 1.6746, rs: 1.6618). Fall from 1.6746 could be the fourth leg of the consolidation pattern from 1.3503 (2008 low) or resuming long term down trend from 2.1161 (2007 high). In either case, retest of 1.4229 resistance should be seen. Break of 1.4229 will bolster the down trend resumption case and would possibly push GBP/USD through 1.3503 low. On the upside, break of 1.6618 resistance is needed to invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.

 

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:01	GBP	BRC Shop Price Index Y/Y Sep	2.70%		2.70%
0:30	AUD	Retail Sales M/M Aug	0.60%	0.20%	0.50%	0.60%
8:00	EUR	Eurozone PMI Services Sep F		49.1	49.1
8:30	GBP	PMI Services Sep		50.5	51.1
8:30	GBP	GDP Q/Q Q2 F		0.20%	0.20%
8:30	GBP	GDP Y/Y Q2 F		0.70%	0.70%
8:30	GBP	Current Account (GBP) Q2		-11.0B	-9.4B
9:00	EUR	Eurozone Retail Sales M/M Aug		-0.30%	0.20%
9:00	EUR	Eurozone Retail Sales Y/Y Aug		-0.70%	-0.20%
11:30	USD	Challenger Job Cuts Y/Y Sep			47.00%
12:15	USD	ADP Employment Change Sep		70K	91K
14:00	USD	ISM Non-Manufacutring Composite Sep		53	53.3
14:30	USD	Crude Oil Inventories		1.0M	1.9M