Risk currencies ended last week under downward pressure, ahead of a busy week for the forex market. This week, apart from marking Jean-Claude Trichet’s last policy meeting as European Central Bank President, we had a Eurogroup meeting on Monday focused on Greece and the EFSF, a testimony before congress by Fed chairman Ben Bernanke on economic outlook on Tuesday, policy meetings by the ECB and BoE today, and finally, the United States jobs report tomorrow.
At the beginning of the week, risk appetite weakened further during the Asian session, as a Greek government draft Budget showed the country faced larger deficits than previously predicted, re-igniting worries over a possible Greek default. The eurozone finance ministers meeting held on Monday did not do anything to ease any investor fears.
Finance ministers did not take any final decision on whether Greece would receive its next tranche of aid, and agreed that they could wait until mid-November until they receive it. On the other main topic of the meeting little progress was made in terms of additional steps to increase the size of the European Financial Stability Fund.
The euro was under increased pressure at the start of the week, extending its sell-off from last week. The single currency fell to a nine month low against the dollar and a 10 year trough versus the yen by Tuesday, as euro zone policy makers failed to ease market fears, while signalling bondholders may take bigger losses on Greek debt. Higher-yielding currencies came under pressure while the greenback and the yen were supported by ‘safe-haven’ flows.
The dollar rose to a nine month high against a basket of currencies as forex investors grew increasingly concerned that the eurozone periphery crisis will dampen global recovery prospects. The greenback was up more than 1.50 per cent on the week versus the single currency by the time of writing, more than 2.50 per cent against the Aussie, 1.65 per cent versus the Swissie and 1.35 per cent against sterling.
EUR/USD fell to 1.3145 by Tuesday. It opened sharply lower on Monday from Friday’s close, and broke support represented by the 76.4 per cent Fibonacci retracement of the 2011 low – high move by 1.3361. We now expect the pair to test its yearly low at 1.2874. It may run into support around 1.3050, December 2010 consolidation levels.
The pair had resumed its decline last Friday, on speculation that the European Central Bank may cut its rates in its next policy meeting which is scheduled for today. Some economists are even predicting a 50 basis point rate cut from Mr Trichet’s last board meeting.
RTFX Trend is bearish on EUR/USD, with a start rate at 1.3678 on September 13, and has recorded a 3.81 per cent gain by Monday’s close. Sterling also came under pressure against the dollar and the yen, tracking other ‘riskier’ currencies lower. Low risk sentiment and extraordinary risk aversion in recent weeks have increased expectations that the Bank of England may resort to further quantitative easing to revive its ailing recovery, which is weighing on the British currency. The pound is also weighed by concerns that the debt crisis haunting
Europe’s periphery may have a devastating effect on the British economy and its banks due to their exposure to Greece’s debt. The Bank of England is expected to announce its policy decision today. Forex investors will be especially focused on whether the Central Bank announces more easing in today’s policy meeting, although November is still seen more likely.
GBP/USD dropped from 1.5666 on Friday to 1.5359 on Tuesday, and is hovering close to a 13-month low at 1.5328, hit on September 22. Cable extended its decline on Tuesday after worse-than-expected UK construction data added to mounting speculation that the BoE will need to resort to more stimulus to lift the economy.
The euro recovered slightly versus sterling on Tuesday following the downbeat UK PMI numbers. More importantly EUR/GBP bounced off the 0.8531 level reached yesterday. The pair had recently rebounded from 0.8532, hit on September 12. There is a potential double bottom forming at this area, around 0.8530, which will be confirmed if the rebound in EUR/GBP gathers steam. A break to the downside should see the pair test key support by its 200-week moving average at 0.8512.
Early on Tuesday, the Reserve Bank of Australia kept its policy rates unchanged in line with market expectations, and in its policy statement, the central bank suggested that an easing of inflation pressures may pave the way for an interest-rate cut. The Aussie fell across the board following the announcement. It was down more than 1.70 per cent versus its major rivals on the week. AUD/USD fell to a year’s low at 0.9395, while AUD/JPY was down to 72.06, hovering close to its lowest since May 2010 at 71.89.
Upcoming FX key events:
Today: UK BoE Interest rate decision and EZ ECB Interest rate decision.
Tomorrow: Japan BOJ Interest rate decision and US Non-farm payrolls.
FX technical key points:
EUR/USD is bearish, target 1.2850, key reversal point 1.3900.
EUR/GBP is neutral.
USD/JPY is bearish, target 75.50, key reversal point 81.50.
GBP/USD is bearish, target 1.5200, key reversal point 1.6000.
USD/CHF is neutral.
AUD/USD is bearish, target 0.8900, key reversal point 1.000.
NZD/USD is bearish, target 0.7100, key reversal point 0.8000.
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Mr Xuereb is a trader at RTFX Ltd.