The US dollar resumed its rise against the Japanese yen on Tuesday of this week, after paring some of last week’s gains. The greenback fell against the euro and yen on Monday as forex investors scaled back on expectations that Federal Reserve chairman Ben Bernanke would suggest reducing their asset purchases programme.
Sterling dropped sharply on Tuesday on weaker than expected inflation data out of Great Britain
The Japanese yen also found some respite from comments by Japan’s Economy Minister Akira Amari over the weekend. The minister suggested that the Nipponese currency may have weakened enough and that further weakness could hurt the Japanese economy. Despite the drop, forex analysts still favored dollar gains against the yen as Tokyo remains committed to easier policy.
USD/JPY opened the week at 102.75, down from a four and a half year high of 103.31, hit on Friday. The pair fell as low as 102.00 on Monday, before recovering to 102.85 on Tuesday. The dollar rose as the Economy Minister clarified his remarks regarding the yen’s weakness and said he hoped the yen settles at levels justified by market forces.
Despite resuming strength on Tuesday, the greenback stayed well off its highs against its major rivals, as forex traders were cautious about adding more bets on the buck before Bernanke’s testimony. At the time of writing, the market’s focus was on the minutes from the last Fed FOMC meeting, which were to be released yesterday and Bernanke’s testimony to Congress also on the same day.
Recent speculation that the Fed may trim its quantitative easing programme sooner than expected have lifted the greenback in recent weeks, especially as the labour market has shown signs of improvement. Any hints, either from the minutes or Bernanke’s testimony, on scaling back the Fed’s record $85 billion a month bond-buying programme could skyrocket the dollar and lift it to new multi-year highs against a basket of six major currencies.
EUR/USD had risen to 1.2904 on Tuesday, but failed to sustain a rally above the 1.2900 level and fell back to 1.2841 by the time of writing. The pair reversed lower after Chicago Fed president Charles Evans said that as long as the recent improvement in the US labour market continued, he was “open-minded” about cutting back on the Fed’s bond-buying programme. This came as quite as a surprise, as it came from the usually dovish Evans, who is presently a voting member on the FOMC.
Precious metals remained under pressure last week, and although they recovered slightly on Monday, they failed to hold on to their gains. Gold tested repeatedly the $1,400 level between Monday and Tuesday, but the recovery in dollar strength weighed on the yellow metal, as it looked like it would record its eighth fall in nine sessions.
XAU/USD hit a session high by 1,401.55 at the close of the Asian session on Tuesday, but soon plunged to 1,365.12, not far from a 27-month low by 1,321.96 hit on last April. Precious metals have been under pressure ever since speculation surfaced that the Fed may be tapering on their stimulus programme earlier than expected.
The Aussie dollar has been on a major down move over the past several weeks. A major sell off was sparked by Asian central banks selling their long positions in Aussie dollar after the Reserve Bank of Australia cut its interest rates by 25 basis points to 2.75 per cent. Given its high correlation to the price of gold, the Australian dollar was also weighed by the steep drop in the yellow metal.
From a technical perspective, AUD/USD failed several times to surpass the 1.0600 mark since August of last year. The pair attempted this level again last April, but aborted at 1.0585 and fell more than eight per cent to 0.9712. We are now in the midst of a technical correction within this strong downtrend, although a technical bottom hasn’t been established yet.
Sterling dropped sharply on Tuesday on weaker than expected inflation data out of Great Britain. Consumer prices rose two per cent in April compared to the same period last year, but less than market consensus for 2.6 per cent. GBP/USD fell to a session low by 1.5124 on Tuesday, its lowest since April 4.
Technically, GBP/USD broke out of a bearish flag formation on Friday of last week, suggesting acceleration to the downside. A corrective bounce was capped by 1.5280 on Monday and the down move was confirmed on Tuesday. Initial targets lie around 1.4990 - 1.5030, which is an extension of the neckline from the inverted head and shoulders bullish reversal pattern in March. A break below would give scope for a test of this year’s low by 1.4832.
Upcoming FX Key events:
Today: UK GDP, US New Home Sales, EZ Consumer Confidence Index. Tomorrow: German GDP, GFK Consumer Confidence Survey & IFO Business Climate index.
Technical Key points
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bullish, target 103.26, key reversal point 97.15.
GBP/USD is bearish, target 1.4990, key reversal point 1.5400.
USD/CHF is bullish, target 0.9972, key reversal point 0.9208.
AUD/USD is bearish, target 0.9580 key reversal point 1.01.
NZD/USD is bearish, target 0.7927 key reversal point 0.8286.
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Emman Xuereb is a trader at RTFX Ltd.