Riots in Egypt motivated by high unemployment and inflation and an authoritarian government have dominated news headlines this week and civilian protests escalated to a “million man march” on Tuesday.
The Egyptian riots come just after a similar situation materialised in Tunisia, and investors are asking themselves whether the instability will keep escalating in Egypt and whether the scenario will be repeated in other countries.
Last Friday the EUR/USD currency pair dived to lows of 1.3583 after having reached highs of 1.3746. The sudden strengthening of the US dollar was mostly attributed to concerns over the Egyptian situation that caused money flows to the traditional safe haven currencies.
However other factors also helped garner support for the US dollar. Data released Friday from the United States was, on the whole, relatively positive, or at least not negative; GDP advanced was by and large in line with expectations at 3.2 per cent against an expected 3.5 per cent (and most importantly better than the previous 2.6 per cent) and the Michigan Consumer sentiment index was better than expected at 74.2 against the projected 73.2.
Tensions over Egypt also pushed the price of gold higher. Last Friday the precious metal rallied from around 1,311.70 to a day’s high of 1,347.20 in a couple of hours. Early this week support for the precious metal eased initially but was mostly trading sideways. Uncertainty in the Middle East has dented risk appetite but apparently has not extinguished it.
A higher year-on-year estimate for eurozone inflation released last Monday came out at 2.4 per cent. The figure was slightly higher than expected and higher than the previous 2.2 per cent. The data revived recent speculation that the ECB might have to raise rates sooner than the Federal Reserve.
On release of the data the EUR/USD currency pair pushed higher and the euro managed to pare losses made Friday evening. The eurozone unemployment rate inched lower to 10 per cent from a previous 10.1 per cent; this helped to keep support alive for the single currency.
The bullish trend for the EUR/USD pair continued and tested resistance around the 1.3760/70 region when it hit highs of 1.3775. Looking at daily and four hourly charts we see that the currency pair has been bound within a channel formed by significant support at around the 1.3570 region and significant resistance at 1.3760/70 region since January 21.
PMI data coming out earlier this week from the United Kingdom was rather positive, with PMI manufacturing at 62 (vs. 57.9 expected and 58.3 previous). The figure was supportive for the British pound as it gained a total of around 1.35 per cent against the other major counterparts on day, prior to US open. As most of the gains were made against the US dollar the gains registered by British pound were also a result of the softer US dollar.
This helped resurface previous speculation that BoE would be hiking rates sooner than expected. For the former part of the week the GBP was up 1.57 per cent against the USD and up 0.50 per cent against the euro.
For the week, RTFX Trader Tip EUR/GBP sees resistance for the upside at 0.8670/0.8761 and to the downside sees support at 0.8491/0.8402 – the pair is currently trading 0.8541 at the time of writing.
The Japanese yen continued to strengthen against the US dollar. The USD/JPY had shot up late last week when Standard and Poor’s downgraded Japan on the grounds that there was no “coherent strategy” to try to harness the debt situation, however JPY losses did not last too long. On the news the USD/JPY currency pair jumped from 82.18 to 83.21 in less than 30 minutes. At the time of writing the pair is trading at 81.59 down 0.65 per cent from week’s open.
The Aussie reclaimed parity against the US dollar on Tuesday helped by the rising commodity prices and improving global economic growth. Earlier Tuesday morning the RBA kept its policy rate unchanged at 4.75 per cent and signalled no changes in what it was expecting for the future. The RBA also played down the impact of the recent floods and said that damage and effect on the economy were only expected to be temporary.
For the former part of this week the AUD/USD has traded in the range of 0.9867-1.0077 up to the time of writing and from year’s open the Aussie is down 1.35 percent against the greenback.
Upcoming FX Key events:
Today: EZ ECB Interest Rate Decision, EZ Retail Sales & US Factory Orders.
Tomorrow: US Non-Farm Payrolls, US Unemployment Rate & Canadian Net Change in Unemployment.
FX Technical Key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9500.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.