In­di­ca­tions weaker Euro might be help­ing data

Financial Mirror (Cyprus) - - FRONT PAGE -

Spec­u­la­tion sur­round­ing the pos­si­bil­ity of the Euro­pean Cen­tral Bank (ECB) con­sid­er­ing ex­tend­ing its as­set pur­chase pro­gramme in early 2015 en­cour­aged in­vestors to price in fur­ther stim­u­lus from the ECB. As such, the EURUSD ex­tended be­low its re­cently formed bullish trend­line. On the other hand, there are sig­nals that the sub­stan­tially weaker ex­change rate could be help­ing eco­nomic data fol­low­ing both the Ser­vices and Man­u­fac­tur­ing PMIs com­ing in above ex­pec­ta­tions, which en­cour­aged the pair to con­sol­i­date as the week con­cluded.

The up­com­ing week for the Euro-dol­lar is go­ing to be busy. The majority of the Euro­pean data is re­leased from Ger­many, where sus­pi­cions re­main that the coun­try could be en­ter­ing another re­ces­sion, as sug­gested by Ifo forecasts. We also ex­pect Ger­man im­port data (Tues­day) along­side Un­em­ploy­ment Change and Ger­man in­fla­tion (Thurs­day), and on Fri­day, there is op­ti­mism EU in­fla­tion will have im­proved to an an­nu­alised 0.4%.

How­ever, as we have reg­u­larly seen in the past, the price at which the Eu­rodol­lar trades can change in an in­stant de­pend­ing on de­mand for the USD. Wed­nes­day will be an im­por­tant day for this pair with the US Fed­eral Re­serve due to make a pro­nounce­ment on eco­nomic pol­icy. If they de­vi­ate from their ex­ist­ing plan and in­stead an­nounce the con­tin­u­a­tion of QE, this will have the knock-on ef­fect of en­sur­ing that an in­ter­est rate rise re­mains a long time away. If this sce­nario even­tu­ates I would ex­pect wide­spread USD profit-tak­ing and it would not be a sur­prise if the EURUSD re­versed to the up­side and jumped to­wards 1.28.

Look­ing at the tech­ni­cals, the EURUSD re­mains inside the same bear­ish chan­nel it has found it­self within for a few months. There is room on both the up­side and down­side for this pair to move over the com­ing week. Pos­si­ble re­sis­tance can be found at 1.2739, 1.2765 and 1.2839 with support lev­els at 1.2613, 1.2570 and 1.2508.

The GBPUSD roller­coaster con­tin­ued last week with the pair again rev­ers­ing in di­rec­tion. The pair de­clined by close to 100 pips fol­low­ing the Bank of Eng­land (BoE) Min­utes re­lease sound­ing far more dovish than ex­pected. The min­utes re­ported that there are signs of the UK econ­omy los­ing mo­men­tum, weak price pres­sures re­main and mem­bers of the Mon­e­tary Pol­icy Com­mit­tee (MPC) are ap­pre­hen­sive about pre­ma­ture in­ter­est rate rises leav­ing the UK econ­omy vul­ner­a­ble to af­ter­shocks.

Not all of the com­ments were un­ex­pected, but the gen­eral con­sen­sus was that the BoE is prob­a­bly even more dovish now than what be­fore the last meet­ing. For ex­am­ple, UK in­fla­tion has since fallen to 1.2%, far away from the thresh­old tar­get of 2%, the level at which it will con­sider a rate rise. Ad­di­tion­ally, although Fri­day’s GDP re­lease came in line with ex­pec­ta­tions at an an­nu­alised 3%, the econ­omy ex­panded 0.2% less than the pre­vi­ous quar­ter – mean­ing the BoE was valid in sug­gest­ing eco­nomic mo­men­tum is slow­ing.

The up­com­ing week is very low with UK eco­nomic data, mean­ing the GBPUSD will move ac­cord­ing to de­mand for the USD. From a tech­ni­cal stand­point, the pair found sta­ble support around 1.60 last week, sug­gest­ing moves be­low 1.60 might be limited. I am not ex­pect­ing Janet Yellen to ap­pear hawk­ish on Wed­nes­day, en­hanc­ing the chances of the GBPUSD ben­e­fit­ing from risk ap­petite.

At the be­gin­ning of the week, Gold con­tin­ued to progress but fell short of sur­pass­ing re­sis­tance around $1255. Fol­low­ing US in­fla­tion com­ing in higher than fore­cast, spec­u­la­tion that the Fed­eral Re­serve may con­sider un­ex­pect­edly con­tin­u­ing QE calmed down which en­cour­aged Gold to pull­back and con­clude the week find­ing support just above $1230.

Gold is po­ten­tially en­ter­ing its most volatile week. I ex­pect the Fed to con­clude QE on Wed­nes­day evening and spec­u­la­tion sup­port­ing this view should lead to Gold con­tin­u­ing to move lower dur­ing the week. How­ever, I also ex­pect Fed­eral Re­serve Chair Janet Yellen to com­pletely dis­miss any chances of a US in­ter­est rate rise any­time soon. If Yellen also at­tempts to talk down the US econ­omy, there could be po­ten­tial for Gold to go on one fi­nal bull run this year. In the event the Fed un­ex­pect­edly con­tin­ues QE, the prospects for Gold are bullish.

In ref­er­ence to my tech­ni­cal ob­ser­va­tions for Gold on the Daily time­frame, both the Stochas­tic Os­cil­la­tor and RSI ap­pear to be cur­rently rang­ing. This is not un­usual with such a key event such as the FOMC decision ahead, but if spec­u­la­tion emerges dur­ing the week that the Fed will con­clude QE as planned, the po­ten­tial is there for Gold to con­tinue ex­tend­ing to­wards the crit­i­cal $1180 support level. Support be­fore can be found at $1220 and $1205.

If the op­po­site oc­curs and if there is mar­ket spec­u­la­tion that the Fed­eral Re­serve will con­tinue QE, I would ex­pect sud­den bullish move­ment. Gold has strug­gled to sur­pass re­sis­tance at $1250 and $1270 pre­vi­ously but the Fed con­tin­u­ing QE would weaken con­fi­dence in the US econ­omy, mean­ing Gold should chal­lenge th­ese lev­els.

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