Franco-German deal eases investor concerns

Better US Payrolls data last Friday and a statement by German Chancellor Angela Merkel and French President Nicolas Sarkozy on Sunday eased, at least temporarily, investors’ concerns. This gave risk sentiment a lift for the former part of the week. The euro quickly shrugged off the negativity of the news that late last Friday Fitch downgraded Italy and Spain.

Ms Merkel and Mr Sarkozy pledged to come up with a plan meant to address the problems concerning Greece, European bank recapitalisation, and better economic coordination in the eurozone by the end of October ahead of the G20 meeting. The leaders of the two largest economies in the eurozone were speaking after talks in Berlin last Sunday.

Throughout last week a series of central banks were due for their policy rate decisions. Last Thursday the European Central Bank announced it will provide markets with additional liquidity – the announcement was a euro positive, despite markets building expectations of future rate cuts.

Last Thursday’s news conference was also the last one for President Jean Claude Trichet who will be succeeded next month by Mario Draghi, currently the Governor of the Italian Central Bank. Mr Trichet’s comments showed that in the medium term risks of upward inflationary pressures should diminish.

The Bank of England as well announced its policy decisions on Thursday.

It opted for a £75 billion QE2 programme, which had been somewhat expected, but the amount had been forecast to be around £50 billion. BoE Governor Mervyn King explained that the decision for further quantitative easing was motivated by the strained funding markets and the expected decreasing medium term inflationary pressures. Mr King and other commentators from the Monetary Policy Committee indicated that the option for more quantitative easing remained open.

When seen against the majors the British pound is down 0.59 per cent for the week. Against the dollar sterling continued to recover ground after hitting 1.5271 last Thursday, the pair rose to 1.5689 in the former part of this week. Yet against the euro sterling was softer. The EUR/GBP traded in the range of 0.8604 - 0.8733, for the current week resistance is seen between 0.8712 - 0.8821 while support lies between 0.8422 - 0.8512. Continued mixed data and the apparent commitment to even more quantitative easing quantitative easing, if needed, should continue to weigh on sterling.

The Bank of Japan made no changes to its monetary policy and did not announce any new measures. The Japanese Central Bank said it expects its economy to grow at a moderate pace but downside risks posed by other regions might hinder domestic growth. Tuesday’s news, this week, that Chinese government was planning to boost its stakes in some of the country’s biggest banks also helped raise hopes.

The EUR/USD opened this week’s session at 1.3405, and at the time of writing has so far hit highs of 1.3698. The currency pair has traded in the range of 1.3377 - 1.3698 for the former part of this week. Currently the euro rose 1.45 per cent against the US dollar. On four hourly charts the EUR/USD’s move to 1.3698 has retested the falling trend line visible since early September. A break above 1.3700 levels could open the door to continued bullishness.

For the current week, we continue to see potential for the currency pair to reach above 1.3731 and possibly extending further towards 1.3792 (the 200 SMA on four hourly timeframe). We see support in the region of 1.2973 - 1.3180. Yet, after the move up, investors should caution because the risk of disappointment by eurozone policymakers could weigh on the euro. Analysts also warn about the unlikeliness of a long lasting euro rally.

On Tuesday Greece announced that the troika (ECB/IMF/EU) had concluded their review the previous day. Later on Tuesday the EU, IMF and the ECB issued a joint statement indicating that once their review is approved the next tranche should be made available in early November.

Gold traded in the range of $1638.22 - $1684.95 earlier this week. The metal seems to have currently detached itself from its safe-haven appeal and is moving more in line with the commodities market.

For the current week we see resistance in the region of $1677.97 - $ 1719.66 and support at $1554.36 - $1595.32.

Upcoming FX key events:
Today: German CPI & HICP and ECB monthly report.
Tomorrow: EZ HICP, US Advanced Retail Sales, and US Michigan Consumer Sentiment.

FX technical key points:
EUR/USD is bearish, target 1.2870, key reversal point 1.3850.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5125, key reversal point 1.600.
USD/CHF is bullish, target 0.95, key reversal point 0.8650.
AUD/USD is bearish, target 0.9300, key reversal point 1.03.
NZD/USD is bearish, target 0.74, key reversal point 0.8250.

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Mr Muscat is a senior trader at RTFX Ltd.