Japanese elections gave the week’s start a new tinge of optimism, as news hit the wires that the LDP party had won the general elections. This was in line with expectations, but the stronger results are expected to give the LDP-led coalition government a two-thirds majority in the lower Parliament and give the new Government considerable clout to push forward necessary reforms.

Gold has been trading off its longer term bullish trend since September 2011- Rudolf Muscat

The Prime Minister expected to be sworn in continued to call for more aggressive monetary stimulus from the Bank of Japan, ahead of a policy meeting later this week. Easier monetary policy twinned with fiscal spending is expected to weaken the yen and beat deflationary pressures.

Last Monday the USD/JPY hit 20-month highs of 84.21. For the current week we are expecting the currency pair to find resistance in the region of 84.28 - 85.04 while to the downside support should hold price moves at 82.43 - 81.35.

From the US, ongoing ‘fiscal cliff’ negotiations seem to have reached new levels and media reports suggest that the gap between the Democrats and the Republicans could be narrowing. A face-to-face meeting last Monday between the President and House Speaker Boehner seems to have generated an offer and counter-offer as both sides trim their differences. In essence, Republicans are offering to accept a tax rate increase for the wealthier – a move seen key to reaching a deal.

As expected, Thursday of last week, the Fed made no changes to its policy rate but made some interesting (though expected) announcements for fresh stimulus. The Fed announced another round of unlimited stimulus, an additional $45 billion per month in Treasury purchases twinned with the ongoing $40 billion per month in mortgage-backed securities.

In its announcement the Federal Reserve said it will continue with its programme until unemployment rate falls below 6.5 per cent and inflation hits 2.5 per cent, as it tries to curb unemployment especially at a time of potential vulnerability posed by the ‘fiscal cliff’.

EUR/USD, trading at the price of 1.3180 at time of writing, is currently above the 38.2 per cent Fibonacci retracement of the move lower since May 2011 highs. We expect the price of EUR/USD to find resistance around 1.32, a clear break of this area at daily close could expose the 50 per cent retracement – at 1.35. If the price does not manage to find the momentum to move higher, expect consolidation around 1.30 levels.

The price for gold (currently around $1,700) has remained supported at $1,694.20, the 38.2 per cent retracement of the May to October 2012 move higher. On the upside, we expect price moves higher to find initial resistance at $1,733.40, the 23.60 per cent retracement of the same move.

What was really interesting to note on Thursday of last week, when the Fed announced more monetary stimulus, the price of gold actually slipped lower (to $1,693.56) rather than higher. Since then the price of the yellow metal could not find the necessary momentum to break above $1,700 until Tuesday this week.

Loose monetary policy, currency debasement fears, a potential threat of inflation and expectations that global reversal of loose monetary policy will take time should still in the end feed into support for the price of gold. Yet, uncertainty surrounding the ‘fiscal cliff’ outcome and end-of-year hesitance has left their effect on the price. Gold has been trading off its longer term bullish trend since September 2011 and since price has been mostly trading within a range.

In the former part of the week, the British pound managed gains across all the majors – with the largest gains coming from against the weaker JPY and the NZD. Beyond this week however, if we had to focus on the current month’s performance, even if the GBP was still making gains across most of the major currencies, it was overall weaker when related to the euro and the NZD.

Overnight last Tuesday the RBA released the minutes for its December 4 policy decision. The Australian Central Bank had opted to slash interest rates by 0.25 per cent to three per cent. In the minutes the bank quoted a softer labour market as the motivating factor behind the rate cut.

Upcoming FX key events
Today: US annualised Q3 GDP, EZ consumer confidence, Canadian retail sales and BoJ rate decision.
Tomorrow: UK Q3 GDP and Canadian GDP.

Technical key points
EUR/USD is bullish, target 1.3280, key reversal point 1.2600.
EUR/GBP is bullish target 0.8220, key reversal point 0.7950.
USD/JPY is bullish, target 85, key reversal point 79.25.
GBP/USD is bullish, target 1.6300, key reversal point 1.5800.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

trading@rtfx.com

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 subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. 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.

Rudolf Muscat is a senior trader at RTFX Ltd.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.