FX investors were cautious ahead of Fed meeting

Risk sentiment was fairly muted in the former part of this week, as FX investors waited for the outcome of the Fed’s Federal Open market committee (FOMC) meeting. The euro was hurt as investors were somewhat disappointed by the fact that no tangible ideas, with regards to the eurozone, were communicated after the Eurogroup and Ecofin meetings throughout the weekend.

In addition news regarding Greece continued to portray a dismal picture for the ailing country.

Media reports suggested that the Troika (ECB/EU/IMF) would be demanding more austerity measures in exchange of the next tranche of aid in October.

Also dragging the single currency lower was Standard and Poor’s downgrade to Italy’s long term debt to A from A+.

The credit rating agency stated that it was motivated by weak growth expectations and a political situation that might hinder an effective tackling of debt.

The Reserve Bank of Australia released its minutes early last Tuesday.

The RBA said that its decision to stay on hold earlier this month was motivated by the need to assess whether the uncertain global outlook would be enough to cool inflationary pressures. The Australian Central Bank also stated: “There was little evidence available to help gauge the effect of the European and US problems on other regions.”

Futures markets were anticipating a rate cut on the back of global economic tensions, yet the RBA seems to suggest it will remain on hold for some more time. Analysts are now thinking that RBA might stay on hold throughout 2011 until the global turmoil clears.

AUD/USD traded in the range of 1.0148 - 1.0274 earlier this week.

For the current week we see potential for the pair rising towards 1.0480, but after such rise a correction should be expected. Resistance is seen between 1.0480 - 1.0592, and support between 1.0066 - 1.0217.

The main focus this week was the Fed’s FOMC meeting, as investors awaited the Fed to reveal its new policy ‘tools’. Unfortunately this article was written ahead of the outcome of the event.

Analysts were expecting something in line with ‘Operation Twist’, originally introduced way back in the 1960s. Simply put ‘Operation Twist’ mainly aims to lower longer term interest rates while keeping short term rates unchanged.

The idea behind such move is that business and housing investment are primarily determined by the longer term interest rates.

In practice, the Federal Reserve would sell shorter dated securities to buy securities with a longer term maturity – aiming to flatten the yield curve, maintaining shorter term rates and lowering the longer term ones.

EUR/USD traded in the range of 1.3586 - 1.3744 in the former part of this week. Caution prior to the Fed’s FOMC kept the pair relatively volatile and unable to establish a clear trend.

For the current week we expect the currency pair to retest 1.3988 levels, after the fall towards 1.3550 region – in extension the pair could drop towards 1.3307, a fall below this level would abort this expected rise. We see support between 1.3307 - 1.3551 and resistance between 1.3988 - 1.4181.

On a daily time frame the downtrend accelerated towards recent lows at 1.3499, as the EUR/USD broke below the 1.4060 levels earlier this month. On a weekly time frame the pair is currently still below the rising trend line visible since Mid-June, and also below the 100-week moving average at 1.3721.

So far this week, compared to the majors the euro is down a marginal 0.08 per cent; GBP is up 0.23 per cent, USD is up 0.74 per cent , the CHF sheds 0.82 per cent and the Yen gains 1.04 per cent. These figures come prior to the FOMC meeting.

Early this week Gold traded in the range of $1770.15 - $1827.95 still off record highs of $1921.17, reached on September 6. Ahead of the FOMC, gold was expected to remain supported at $1770.15, sustained by the expectations of the Fed’s policy to keep interest rates low.

Lower rates are supportive for the safe haven metal that would be expected to lose out to yield-bearing assets when rates do rise. Gold also remains supported by the ongoing global uncertainty.

Throughout the current week we expect support for the metal to be in the range of $1711.25 - $1759.45, while price trading should find resistance in the $1859.20 - $1910.75 zone.

Upcoming FX key events:
Today: EZ Flash PMI, Canadian Retail Sales & Swiss ZEW Indicator.
Tomorrow: French Consumer Confidence & Business Climate index.

FX technical key points:
EUR/USD is bearish, target 1.3400, key reversal point 1.4300.
EUR/GBP is neutral.
USD/JPY is bearish, target 75.50, key reversal point 81.50.
GBP/USD is bearish, target 1.5450, key reversal point 1.6150.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

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Mr Muscat is a senior trader at RTFX Ltd.