The euro back in support while gold pauses

Data for German producer prices (PPI), reported last Tuesday, showed that PPI registered a 0.4 per cent rise throughout February, easing from the previous month’s 0.6 per cent rise – the figure was moderately lower than the forecasted 0.5 per cent. The yearly figure manifested a similar trend; with actual numbers for February at 3.2 per cent.

The USD has been gathering support overall on the back of improved data- Rudolf Muscat

The interest for this data is because these figures measure price changes at the producers’ level; they thus offer a potential insight on the upcoming price levels at the consumer level. In the former part of this week the euro remained on the defensive gaining an average 0.46 per cent when seen across the majors; the single currency was only marginally weaker against the Swiss franc – keeping within the range of 1.2055 – 1.2069.

Against the USD the euro was up 0.14 per cent at the time of writing, even after paring most of Monday’s rise. Last Monday the EUR/USD rose to highs of 1.3265 after registering a 90 pip rise in the span of an hour. The EUR/USD, currently in the vicinity of 1.3200 levels, is holding at one week highs. The successful sale of €1.5 billion worth of 20-year bonds from the European Financial Stability Facility (EFSF) in the former part of this week also helped keep support for the single currency alive.

The USD has been gathering support overall on the back of improved data; because this makes a third round of easing less likely. While overall the USD still remains in positive territory for the current week, it was softer especially when seen against the euro and the CHF as investors paused to reassess whether the improved US data was in fact enough to avert a third round of easing.

Last Monday, William Dudley, a Fed member, to some extent questioned the need of more stimulus from the US central bank. The greenback holds itself in positive territory up an average 1.45 per cent against the major currencies, since month’s start. This week the USD was softer against the euro, CHF and GBP but gains made on the JPY, CAD, AUD and NZD, and in fact surpassed the losses made there.

From the United Kingdom inflation data for the month of February showed that CPI dipped to its lowest level since November 2010 – the yearly figure came out at 3.4 per cent compared to the previous month’s 3.6 per cent. Easing inflation is hoped to help consumers increase consumption.

Later today the UK will be announcing actual figures for retail sales, expectations are for a contraction in the monthly figure. The British pound garnered average gains of 0.37 per cent against the major counterparts, even though it was marginally lower against the euro and the CHF.

The Reserve Bank of Australia (RBA), early Tuesday morning, released the minutes of its last policy meeting. Most specifically the Australian central bank continued to highlight its decision to remain on hold as downside risk were less likely to materialise and that the effects of a higher AUD were by and large set off by a boom in the mining sector.

Better US data and comments from Fed officials have held back support for gold, the yellow metal is currently trading around $1650 levels, levels last seen around the end of January. US Federal Reserve chairman Ben Bernanke’s comments last week, with regards to the outlook for economic growth strained the metal’s gains. With Bernanke’s choice of words shifting from modest to moderate – when it comes to the outlook for economic growth; the likeliness of a third round of QE becomes more remote.

So far it seems that gold is still highly likely to resume its longer term bullish trend, even if the Fed is less into QE3 than before; the ECB’s recent rush of liquidity and the frail global economic recovery should still keep interest for the metal alive. To the downside a key level lies around $1585.90, the 76.40 per cent retracement of the move up from December lows to February highs; and $1522.60 (December lows). A clear break of $1585.90 could open the door for more weakness given that this point also lies on the bearish trend line, delineated by the September, November and December highs.

To the upside $1688.40 and eventually $1800 should provide significant resistance. $1688.40 is the 38.20 per cent retracement of the December to February move higher, but this level has also provided significant horizontal resistance/support from August 2011 to date.

FX key events:
Today: EZ Flash PMI, UK Retail Sales & US Weekly Jobless Claims.
Tomorrow: Canadian CPI & US New Home Sales.

Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 78.00.
GBP/USD is neutral.
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.