March will be filled with major events for the euro. This week, the planned banking stress test criteria (banks should be tested in the first half of this year) are being discussed by the European Banking Association, and today the ECB holds its monthly meeting.
In mid March, the euro group monthly meeting for eurozone finance ministers and the Ecofin meeting for the EU finance ministers is expected to be held. Subsequently, from March 24 to 25, the EU leaders’ summit is scheduled – from which Forex markets are expecting a much awaited broad-scope solution to tackle the sovereign debt issues.
While the changes brewing for the euro mostly revolve around policy to tackle sovereign debt issues, there are also more specific issues such as whether or not to enlarge the current EFSF lending capacity, which expires in 2013, and the mechanism that takes off instead of it after it reaches expiry.
So far this week we have seen consistent PMI Manufacturing data; while the figure for the EZ was in line with expectations, data from France and Germany was slightly better than expected. The change in unemployment for Germany was well above expectations and data for February showed that registered unemployed fell by 52,000 versus an expected fall of 15,000 and a previous fall of 13,000. Even the unemployment rate for Germany and the eurozone as a whole ticked lower.
With regards to price trading for the EUR/USD currency pair, since the end of last week we have seen the pair reclaiming the 1.38 territory, and up to the time of writing price trading has been finding resistance around the 1.3855 region. We are currently seeing the formation of the third wave in the Elliott wave-pattern analysis (wave started February 14 at 1.3428).
In the coming days the EUR/USD is projected to head towards the 1.3911- 1.4018 region, but in case of a downturn it should remain supported by 1.3573 and 1.3393.
Recent turmoil in the Middle East and the North Africa have shown that the USD’s traditional safe haven appeal has somewhat been dented and while unrest, especially in Libya, continued to make the headlines the USD was unusually lower.
Many market analysts are attributing this to the fact that the rising oil prices have in fact been worrying investors, and while the higher oil prices could hit the global recovery, the US recovery was seen especially vulnerable given the stance taken up to now by the Federal Reserve when compared to other central banks.
The Fed has up till now maintained its easing stance, while speculation has been rising that the ECB and BoE could be resorting to interest rate hikes sooner than was originally expected. In both cases (for the ECB and BoE) the main culprit for this speculation are inflationary pressures.
Both the ECB and especially the BoE (that has had to deal with stubborn inflation) have been pointing towards short-term upward risks for inflation. However if fears about the effect of higher oil prices do get any worst, and investors will be recalibrating their rate hike expectations for the EZ and the UK, then the USD should earn back some of its safe haven appeal.
From the UK worse-than-expected readings were reported for CBI distributive trade data and final GDP figures issued towards the end of last week. The CBI distributive trade essentially tries to give a flavour to how the monthly retail sales will be. This data eroded support for the GBP; the cable has recently been enjoying support on the back of speculation for an earlier rate hike from the BoE. Keeping this in mind, it is reasonable to expect that any news that could push the rate hike further away will probably lead to corrective moves against the GBP.
In fact the GBP/USD reached weekly lows at 1.6031 last Friday. However in the former part of this week GBP managed to shrug off the doubts cast by the negative data, and pared the losses made against the USD over Thursday and Friday of last week. At the time of writing GBP/USD has made intraday highs of 1.6328 so far, and is currently trading around the 1.6270 region.
For the current week, to the upside we see resistance for the GBP/USD at 1.6382, while to the downside support should hold at 1.6007/1.5898.
Upcoming FX Key events:
Today: German Retail Sales, EZ Revised GDP, EZ Retail Sales & EZ ECB Interest Rate Decision.
Tomorrow: US Non-Farm Payrolls, US Private Payrolls & US Unemployment Rate.
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.