While Monday started off with the US markets closed for Labour Day, we had major data out of the eurozone, the UK and Australia throughout the rest of the week. Undoubtedly the limelight goes to Mario Draghi’s news conference, just after the announcement of the ECB’s policy rate decision later on today, but once that’s over focus shifts to the US labour market’s health check – the Non-Farm Payrolls for the month of August.
The euro continues to mark higher milestones- Rudolf Muscat
Last week’s main highlight involved Ben Bernanke’s comments at the Jackson Hole Symposium. In his intervention, Bernanke somewhat let down expectations to hint further imminent stimulus but nonetheless made it clear it still was a card the Fed could play, as soon as is needed. The USD initially weakened on the day but soon recovered most of the losses made Friday against the euro.
Bernanke said that “notwithstanding these positive signs, the economic situation is obviously far from satisfactory” specifically mentioning the labour market and economic growth. He concluded that “…the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability”. So despite being ready to pull the trigger the Fed chairman failed to depict any immediate stimulus measures.
Data released last Monday showed that the EZ’s manufacturing sector continued to contract and final figures were revised lower. The equivalent UK data was more of a positive surprise, however with actual data coming out better than expected and just a tick lower than the 50 level that delineates contraction and growth. Despite the better than expected data for the UK’s manufacturing sector one should keep in mind that the data still marked a fourth consecutive contraction for the sector.
The British pound was in positive for the former part of this week – while losing against the euro and the CHF it was up against most of the major counterparts. Against the USD the GBP was up 0.06 per cent; while it lost 0.18 per cent to the euro up to the time of writing. The BoE is expected to leave rates on hold and make no changes to its asset purchases programme in today’s policy decision meeting.
In the short run the euro continues to mark higher milestones; the EUR/USD proceeds along the rising trend line visible since July 11, and last Friday the daily close has made it past key resistance at 1.2570 levels which were providing resistance on an intermediate level. At the time of writing, the daily close is now just about to break above another key resistance, that has capped price moves higher since August 2011, around 1.2650 region.
We have reached the possible upside target outlined last week – “In the near term next key levels for the EUR/USD are 1.2638 to the upside” – this level which was hit last Friday. In the long run we continue to see potential price reversal patterns for the single currency. On the broader time frame we still expect to see price levels aiming for 1.30 region in the coming months based on the fundamentals outlined in last week’s article but also on the formation of technical price patterns.
The Aussie started the week on the wrong foot due to the release of some negative data but also ahead of the RBA’s policy rate decision early Tuesday morning. The negative data was in fact not just with regards to the Australian economy but refers also to data out of China, a major trade partner for Australia.
Over the weekend, the official Chinese PMI slipped to 49.2, slipping below 50 for the first time since November 2011. To make matters worse for the AUD, last Monday, July retail sales slipped to -0.8 per cent from the previous month’s 1.2 per cent.
That was not all out of Australia, among other data the RBA’s policy rate decision early Tuesday morning was also of interest. The RBA decided to stay on hold and kept the current policy rates at 3.5 per cent. The Australian Central Bank sounded rather downbeat citing concerns of the terms of trade, a fall in commodity prices and unclear Chinese growth.
Despite the dovishness the Aussie rose higher, supported by short covering with investors having to recalibrate their positions after the RBA failed to hint at any imminent rate cuts.
Upcoming FX key events
Today: EZ GDP, ECB rate decision, BoE rate decision and asset purchases target.
Tomorrow: US unemployment and non-farm payrolls, Canadian unemployment rate and employment change.
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 0.9425.
AUD/USD is bullish 1.08, key reversal point 1.02.
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.