Euro recovers, gold remains resilient
After the Fed, the ECB and US payrolls data last week, this week looks relatively quiet, at least in terms of economic data. Ahead of the possible headwinds and the tail risk of these events, investors chose to be on the defensive when picking the currencies in which to to invest.
Markets were somewhat disappointed by the Fed’s and the ECB’s decision not take immediate action, but both Central Banks said the possibility of further stimulus was still on the cards. Stronger-than-expected US non-farm payrolls surprised investors who were unprepared for such a stronger reading, and indeed most were shorting risk ahead of these events. It was these defensive positions that led to the upward price correction in the euro last Friday, because as these were caught short on the euro they were pressed to recalibrate their open positions.
In its announcement last week, the Fed decided to stay on hold – as expected – but admitted that economic growth in the first half of this year was slower than expected and made it clear it was ready to provide further accommodation if needed – which was the main highlight of the event for investors.
For the ECB the main focus was intervention to cool soaring yields (or rather higher borrowing costs) for Spain and Italy. In his comments, governor Mario Draghi said that a formal application for assistance would be necessary for the ECB to take action to ease “risk premia that are related to fears of the reversibility of the euro”. Draghi, referring to a form of bond-buying programme, suggested that it would be different from the Securities Market Programme. However, he failed to clarify the details surrounding these purchase and left investors confused.
For those investors following the EUR/USD price levels it must have felt like a rollercoaster ride last week. The pair dipped 80 pips post-FOMC statement, and was up again ahead of Draghi the following day – only to shed at least another 150 pips after the comments from Draghi.
The EUR/USD recovered again throughout Friday morning to spike higher on the stronger-than-expected US payrolls data. In terms of price levels, throughout last week we saw highs of 1.2405 and lows of 1.2133; at the time of writing we are currently at 1.2436.
Through the end of last week, we also had some better-than-expected news out of the Asian sessions: Chinese manufacturing showed some resilience and Australian retail sales were stronger than expected. Interestingly enough, while gold did register a weekly loss last week, it has admittedly shown some resilience.
While the outcome, or rather the non-action of the Fed and the ECB last week, would be deemed as non-positive for the yellow metal, it has managed to contain the losses and earlier this week managed to hold $1,600 levels.
While gold’s resilience may be taken as positive for the price levels it is maybe too early to expect a move higher. Technical studies suggest that a daily close above $1,635 could expose $1,674 levels, where the metal should meet significant resistance and bounce lower in the intermediate term – unless, of course, it manages to break the $1,674. We expect the price of gold to hold around $1,570 for the immediate term, unless there is a major turn of events.
Earlier this week, the British pound was weaker, when seen against the euro and the USD. The EUR/GBP made highs of 0.7963 last Monday, as the GBP weakened – but was seen recovering throughout Tuesday. The GBP/USD slipped to 1.5546, on the weaker GBP, but recovered all the losses throughout earlier trading on Tuesday.
Weighing on the GBP was an expected purchase of £1 billion in gilts as part of the Bank of England’s QE programme last Monday. Yet the GBP was also weighed by a weaker-than-expected housing price index and contraction in the industrial and manufacturing output for June; the data continued to confirm speculation of more easing from the BoE.
Early Tuesday morning, the RBA announced it would be making no changes to its current policy rate. Rates for the Australian central bank currently stand at 3.5 per cent. Comments indicated that policy remains appropriate at this stage and they expect US growth to be modest while China does not appear to be slowing any further.
Upcoming FX Key events
Today: US international trade, UK trade balance, and Canadian housing stats
Tomorrow: German CPI , UK PPI, and Canadian unemployment.
Technical key points
EUR/USD is bearish, target 1.2000, key reversal point 1.3000.
EUR/GBP is bearish, target 0.76 key reversal point 0.81.
USD/JPY is bearish, target 77.50, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is bullish, target 1.00, key reversal point 0.95.
AUD/USD is bullish 1.07, key reversal point 1.0178.
NZD/USD is bullish target 0.83, key reversal point 0.78.
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Mr Muscat is a senior trader at RTFX Ltd.