We’re halfway through October and the US is still in shutdown, there has been a lot of speculation and expectation that the debt ceiling issue could be resolved ahead of the previous weekend, but early into the current week no tangible accord had been announced yet, at least up to the time of writing.
In reality while media headlines continue suggesting that US lawmakers are just inches away from striking a deal, what looks likely is that if an accord is reached prior to today’s deadline, it will only allow the US Government to reopen until mid-January to buy it enough time to resolve the debt ceiling by February 7.
As would be expected, ahead of major announcements like this, the EUR/USD trading was mostly sideways with volatility maintaining its earlier pace, but trend dwindling to month’s lows. In the former part of this week price action was seen in the range of 1.3479 – 1.3597.
So far the currency pair’s medium-term bullishness remains intact. Key levels to watch out for are as follows: to the downside a daily close below 1.3435/1.3330; while to the upside a daily close higher than 1.3580 could expose 1.3645/1.3710.
The USD was mildly higher in the earlier part of this week, according to the Bloomberg Correlation-Weighted Currency Index (BCWI), the USD regained at least 0.50 per cent of the 3.15 per cent lost in the last three months.
Late last week the BoE left policy rates unchanged at 0.50 per cent as was widely expected, and made no changes to its £375 billion Asset Purchases Target, again in line with expectations. UK inflation reported last Tuesday showed that for September the month-on-month figure was unchanged at 0.4 per cent and similarly the year-on-year figure was constant at 2.7 per cent.
The BoE targets an inflation rate of two per cent and it still seems to be off this target, analysts anticipate that with an improving economic recovery and possible energy price increases, going back to two per cent may be quite slow. The UK central bank, however, has pledged to keep its policy rate to the current low levels until 2013 and as long as inflation permits it.
Yesterday, the ILO unemployment rate for the month of August remained constant at 7.7 per cent. Later today, retail sales for September are expected to have improved, with the consensus figure expected to swing into growth from a contraction seen in the previous month.
Seen against the US dollar, the British pound has given back at least 23.60 per cent of its July-September recovery – a recovery that had seen the GBP pare back the losses made since January this year. The GBP/USD has eased off its October 1 highs at 1.6260, and is at the time of writing trading at the price of 1.5950.
We remain bullish on the currency pair that is finding significant support around 1.5922, the 23.60 per cent retracement of the same July-September move. A significant break above a horizontal resistance (hindering price moves higher) at 1.6260/80, upon daily close, would open the door for further bullishness, possibly exposing 1.6440/1.6550. One needs to note that 1.6260/1.6280 has been capping price moves higher since April 2012.
Should this scenario not hold, price moves lower should be expected to find initial support at 1.5873/1.5788.
Earlier this week month-on-month home loans and vehicle sales in Australia were reportedly lower – but the limelight for Australian data, in the former part of this week, was the publishing of the minutes of the RBA’s last policy meeting.
Month-on-month home loans and vehicle sales in Australia were reported lower
The Aussie has risen over 2.40 per cent since the beginning of October, when seen against the USD, and has registered gains of 2.42 per cent against a basket of currencies – as reported by the BCWI. AUD/USD is making fresh highs at 0.9547 after opening the month at 0.9317.
In the minutes published early into Tuesday’s session a non-mention by the policymakers, that a weaker currency would help the economy led investors to believe that they were less likely to cut interest rates further – this has helped support for the AUD.
In the former part of the current week the AUD/USD has traded in the range of 0.9431 – 0.9547, and despite five consecutive winning days and the recent bullishness, looking ahead we remain rather neutral on this currency pair at least for the short to medium term. Expect support at 0.9351/0.9410 while resistance should hold price moves higher at the current highs and beyond that at 0.9580.
Upcoming FX Key events:
Today: US deadline on debt ceiling, EZ Construction spending, UK retail sales, US Philadelphia Business Index, & CPI.
Tomorrow: Canadian CPI.
Technical Key points:
EUR/USD is bullish, target 1.3700, key reversal point 1.3300. EUR/GBP is neutral. USD/JPY is bullish, target 103.73, key reversal point 92.50. GBP/USD is bullish, target 1.6400, key reversal point 1.5700. 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.