Investor sentiment continues to be largely monopolised by events from the eurozone. At the start of the current week, risk sold off sharply after remarks by German officials and weak quarterly growth figures from China. Higher yielding currencies slid lower paring some of the gains recorded last week. Last week, currencies such as the euro, Australian dollar and Canadian dollar rebounded sharply higher as risk appetite was supported by optimism over a concrete solution for the eurozone debt crisis and more convincing global data.
On Friday, they rose to multi-week highs versus the dollar and the yen. The euro inched to a four-week high versus the greenback, lifted by a short covering rally as forex investors booked their profits on ‘safe-haven’ bets. EUR/USD rallied over 500 pips in the previous week, closing 3.5 per cent higher at 1.3877 on Friday. EUR/JPY also closed more than four per cent higher last week, rising to a four-week high. The Australian dollar was one of the biggest gainers. AUD/USD closed almost six per cent higher extending its rally from the previous week, after it hit a 13-month low at 0.9388 on October 4t. Notably, AUD/USD bounced off its 100-week moving average now at 0.9670.
The mood was buoyed by increasing optimism that European Union officials were nearing a solution to the periphery crisis. Better-than-expected economic data from G8 nations also raised the mood. Data showed Australian employment rose the most in seven months, the eurozone’s annual inflation number was well above the European Central Bank’s target and US retail sales were much higher than consensus.
However, after extending their gains at the start of the week, risk currencies sold off heavily on Monday and slid further on Tuesday by the time of writing. Sentiment was weighed by a stray remark from a German government spokesman who made it clear that whatever is announced at the upcoming EU summit on Sunday will be far from enough to resolve the debt crisis once and for all. German Finance Minister Wolfgang Schaeuble also dampened optimism that the forthcoming EU summit will not yield a final solution to the debt crisis.
Risk aversion continued gathering momentum after an announcement by Moody’s late on Monday and downbeat Chinese GDP data early on Tuesday. Moody’s said they were worried about how France’s fiscal position might evolve over the coming months given the cost of bailing out European banks. The rating agency warned that it may slap a negative outlook on France’s Aaa rating within the next three months if they fail to make progress on crucial fiscal and economic reforms. China posted its slowest quarterly growth in two years on Tuesday, raising doubts over Europe’s ability to spur enough growth to ease its lingering debt crisis, given that the European Union is China’s largest trading partner.
These events triggered a sharp sell-off in risk assets, driving global equities lower. EUR/USD fell back to 1.3655, well off its five-week high hit earlier. The pair seemed to have stalled ahead of key resistance levels in the 1.4000 area.
The single currency is down more than 1.20 per cent against the greenback so far this week, 1.80 per cent versus the yen, and almost 0.70 per cent versus the sterling. The Aussie is also lower so far this week, almost one per cent on average against its major rivals and the New Zealand dollar is down more than one per cent.
RTFX trend turned bearish EUR/USD on Monday at 1.3737, with a stop loss set at 1.3904. Most majors paired with the dollar also turned bearish starting on Monday. RTFX TraderTip predicts a mretracement lower towards 1.3628 by the end of the week on EUR/USD.
Sterling also fell against the dollar and the yen at the start of the week, tracking the euro lower. It was also weighed by better-than-expected consumer inflation data which topped five per cent annually, fuelling concern that the British economy could be looking at an extended period of elevated inflation and sluggish growth.
GBP/USD declined from a four-week high hit on Friday at 1.5853 to 1.5674 by the time of writing. More significantly it was unable to break and close decisively above its 100-day moving average at 1.5779. RTFX TraderTip’s weekly scenario on GBP/USD suggests a correction down to below 1.5606, with the Elliot scenario predicting a crucial reversal point.
Upcoming FX key events:
Today: German PPI, UK Retail Sales, Eurozone Consumer Confidence and US Philadelphia Fed Index.
Tomorrow: German IFO Business Climate, Canadian CPI and UK Public Sector Net Cash Requirement (PSNCR).
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.