Last week we had some high profile data out of major world economies. Japan’s preliminary annualised GDP for Q4 contracted to -0.4 per cent while improving on a previous -3.5 per cent, the figure came short of an expected +0.4 per cent. Japan also confirmed a no change for the BoJ’s target rate which remained at 0.10 per cent.
UK retail sales data for the first month of the current year were not very optimistic
Focus on Japanese policy goes towards the easing bias that the new government is pushing forward. BoJ governor Shirakawa’s resignation takes effect on March 19 and the choice of the new governor has been a short term catalyst for JPY moves, as investors speculate over the potential radical or less radical styles of the potential candidates. In the meantime, Reuters reports that the Government will nominate a governor and the deputy governors over February 21 to 24.
Earlier this week, BoJ minutes were released for the January 21–22 meeting and comments continued to support stimulus measures. Within the EZ the results from the two top economies were mixed. Year on year preliminary GDP from France contracted by -0.3 per cent while in Germany the equivalent figure showed that it grew, even though by a marginal +0.4 per cent. Overall year on year preliminary GDP (s.a.) for the EZ contracted by -0.9 per cent, deepening the -0.6 per cent reported for the previous quarter, and surpassing an expected -0.7 per cent.
While the overall EZ figures were a disappointment, we remain encouraged by analysts’ reports showing improvements in credit conditions and overall lower yields. Nonetheless the threat of a persistent difference between Germany and the weakest EZ economies will likely keep pressuring fiscal targets. Seen against a basket of major currencies, the single currency is still in the positive for the current month, up by +0.55 per cent despite starting the current week negatively. The EUR/USD traded in a very tight range over Monday and Tuesday, with price trading restricted between 1.3321–1.3379. On Monday, the US was closed for Presidents’ Day so the general trading pattern was mostly unclear, especially after European close.
Our market trend sees the EUR/USD currently on neutral. For the current week we are expecting the currency pair to correct lower towards 1.3270, and after this move down to rise again to the 1.3486 area. To the upside 1.3486/1.3610 should cap price moves higher; while if heading south price moves should be capped at 1.3272/1.3183.
Taking the larger picture the EUR/USD has been recovering substantial ground after hitting lows of 1.2042 in July 2012. On February 1 this year the currency pair hit 1.3710 (highs last seen in November 2011), but has so far failed to find the necessary momentum to charge higher. Technical studies suggest that 1.33 is a key level which if clearly broken could open the door to more downside.
The 1.33 level is the 50-day moving average but is also forming part of a rising trend line (visible on daily charts) that has been providing support to the EUR/USD price since November 2012. UK retail sales data for the first month of the current year were not very optimistic either. Retail sales month on month contracted by -0.5 per cent while the year on year equivalent was at -0.6 per cent.
On the Bloomberg correlation-weighted currency indices, the GBP continues to delve lower. It is down -0.87 per cent in the former part of the week and is also down -2.48 per cent for the current month.
The GBP/USD has made fresh lows at 1.5438 last Monday, lows last seen in July 2012. Currently trading at 1.5477, with RSI (an overbought/oversold indicator) currently skewed towards oversold territory on the daily charts. We might be in for some consolidation or even a slight correction.
We anticipate a move higher towards 1.5663 for the GBP/USD, within the current week. Analysts point towards a continued weakening of the British pound as the BoE signals that it is ready to let inflation run above target for quite some time. Other comments from top BoE officials also continue to suggest that the UK may benefit from a weaker GBP.
Even the RBA in Australia released the minutes of its last policy meeting. Comments suggested that further interest rate cuts were still on the cards, if needed. However the Australian Central Bank decided to stay put for the time being as parts of the economy were responding positively to the lower rates.
Upcoming FX key events
Today: US CPI and existing Home Sales.
Tomorrow: German Q4 GDP (Final) Canadian CPI.
Technical key points
EUR/USD is bullish, target 1.3830, key reversal point 1.3125.
EUR/GBP is bullish target 0.8830, key reversal point 0.8450.
USD/JPY is bullish, target 95.0, key reversal point 83.90.
GBP/USD is bearish target 1.5320, key reversal point 1.5830.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Rudolf Muscat is a senior trader at RTFX Ltd.