Euro marking a turnaround?
For most of the past weeks, markets have been marked by relative hesitation. Traders finally decided to take off for the summer holidays, just after the major policy meetings held in the first week of August, and this significantly brought down market volumes. Then major events took shape both in the eurozone and the US – which so far remain inconclusive.
To appreciate why investors stand still and wait for directions, let us quickly run through the events that are coming up. Next Friday, we have Ben Bernanke’s speech at the Jackson Hole symposium.
On September 12 the German Federal constitutional court will decide whether to give its clearance for the permanent bailout fund and the fiscal pact behind the euro. On September 12 and 13, there is the Fed’s FOMC meeting and the ECB policy decision on September 6. What is behind these events?
From the US, investors want to know if the Federal Reserve will decide to pull the trigger yet another time and help the US economic recovery – and if it comes what shape will it take? FOMC minutes released last week showed that at the last meeting there was a shift from “several” to “many” members who were leaning towards additional accommodation unless economic conditions did not improve significantly.
This need not necessarily mean another round of quantitative easing however, because the Fed is making it clear there is a full list of options to consider and so far they were not showing any preference for anyone of them.
During Bernanke’s speech tomorrow at the Jackson Hole symposium, he is not expected to reveal any future policy moves but rather stop at keeping the door open if additional stimulus is needed and continue to highlight the varied mechanisms that the Fed may use if needed.
In the eurozone the ECB takes the spotlight as investors continue to speculate on action to keep yields capped for the ailing nations’ sovereign debt. Last Tuesday Italy’s Tesoro managed to auction off €3 billion at a better price and improved demand. The average yield was of 3.06 per cent compared to a previous 4.86 per cent and the bid-to-cover ratio (measuring demand) of 1.95 vs. 1.78 previously.
What about the EUR/USD? On a technical level, we could be in for some potentially interesting price reversals (for the longer term), as the bearish trend visible since May 2011 becomes ripe for correction. Last week we hit month’s highs at 1.2589 and we also saw the testing of an inverse head and shoulder formation.
Without getting lost in the technicalities of such a pattern it’s good enough to know that it usually precedes the reversal of a current downtrend.
On the fundamental side, while acknowledging the risks, despite all the hiccups and headwinds the EZ faces “if the eurozone gets through the current acute crisis and continues to make steady progress”, it “could lead the global economy on a host of performance-based criteria.” Here I am quoting the Euro Plus Monitor 2011 – the report continues to say that “eurozone members are going through a wave of sweeping structural and fiscal reforms and major overhaul of government structures” while other countries like the US are not. The US is about to embark on a wave of major fiscal decisions as it faces the threat of a so-called “fiscal cliff” and the upcoming general elections in just three months’ time.
In the near term, next key levels for the EUR/USD are 1.2638 to the upside and 1.24 to the downside, a break of these levels could open the door for more bullishness or bearishness respectively. Taking a broader time frame, we expect to see price levels aiming for the 1.30 region in the coming months, the rise should accelerate if the currency pair makes it through key resistance in the 1.2700/1.2730 region.
Gold has seen its price rise from around $1,600 to $1,675 since August 15, the metal is finding resistance around $1,675. In line with our expectations the metal has made it past the key $1,635 levels to hit $1,675; a daily close above $1,675 exposes $1721.90 the next key level.
Expect the price to remain supported ahead of Bernanke’s intervention at the Jackson Hole Symposium later this week, as investors continue to weigh the possibilities for more stimulus coming from the Fed.
Upcoming FX key events
Today: German unemployment change, EZ Business Climate Index, US PCE. Tomorrow: Canadian GDP, EZ HICP, EZ unemployment rate, Bernanke speaks at Jackson Hole Symposium.
Technical key points
EUR/USD is neutral.
EUR/GBP is bearish, target 0.76 key reversal point 0.80
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 1.00, key reversal point 0.95.
AUD/USD is bullish 1.08, key reversal point 1.03.
NZD/USD is bullish target 0.83, key reversal point 0.7850.
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Mr Muscat is a senior trader at RTFX Ltd.