With the US largely recalibrating the timing of the unwind of its asset purchases based on the issues brought about by the recent government shutdown and the debt ceiling debate, it looks like the markets shall continue to enjoy cheap money at least up till March 2014. Delaying the timing of the asset purchases unwind (or as dubbed by the market Fed tapering) was even the fact that Bernanke shall be stepping down next January and will most likely not change policy direction before the new Fed chairman takes the lead.

In the meantime where does all this bring us to? A weaker US dollar. In these last three months the USD was down by 2.21 per cent according to the Bloomberg Correlation-Weighted Currency Index (BCWI).

The euro continued to take the cue from a weaker US dollar, last week at close the currency pair pushed price to levels that marked near two-year highs. Spurred by the poorer payrolls data published last week as well.

Friday’s highs at 1.3832 were also year’s highs, the EUR/USD continues along a bullish trend line that is visible on daily charts and that extends from July lows (@1.2755) seen this year. Currently it looks like the bullishness remains on the cards, and that the trend indicator approaches fresh highs. However, noting that volatility is at year’s lows and that the currency pair is overbought, one should probably caution against being overoptimistic.

Early into this week the US dollar was seen recovering only marginally with the EUR/USD currency pair down 0.3 per cent up to the time of writing and ahead of the outcome of the Fed’s FOMC on Wednesday evening. For the current week what we are expecting is that the currency pair’s uptrend ends around 1.3876/1.3930, and unless we go above 1.3945 a correction lower towards 1.3695 is favoured.

Low volatility and the probability of lower interest rates for a longer period have set the stage for continued cheap funding and a renewed interest in carry trades – at least for the coming months. Carry trades are generally considered a loan in a low yielding currency such as the yen or the USD to fund investments in higher yielding currencies, such as the AUD and Kiwi.

Last Friday data out of the United Kingdom showed that third quarter advance GDP was out at 0.8 per cent, improving on a previous 0.7 per cent reading. The yearly figure for the same period was out at 1.5 per cent again improving slightly on a previous 1.3 per cent. Both readings were in line with expected consensus figures.

The GBP/USD, trading at 1.6086 at the time of writing, has remained supported well ahead of 1.60 levels, after the currency pair marked fresh highs at 1.6256 mid last week. To the upside we are expecting the GBP/USD to find resistance at 1.6253/1.6325, while to the downside 1.6043/1.5950 should provide initial support.

EUR/GBP reached 2-month highs and is currently trading at 0.8585. For the current week expect initial resistance at 0.8618, while to the downside price moves lower should be supported at 0.8471/0.8409.

The GBP’s outlook continues to improve as the UK economy continues to show resilience, the GDP data out last week showed that the economic growth was at its strongest pace in these last three years. Analysts polled by Bloomberg expect the EUR/GBP to reach 0.83 by the end of the first quarter next year.

Gold registered gains of 2.82 per cent throughout the course of last week, as it marked fresh four-week highs. It is currently trading at $1347.95 at the start of this week as it eases off last week’s highs . Gold has been enjoying support over the end of the US government shutdown and as the prospect of tapering gets kicked down the road.

For the current week we anticipate that the yellow metal should find support at $1347.10/$1339.04, while to the upside resistance should hold price moves higher at $1362.56/$1369.95.

Looking at the most important events this week we see that yesterday the Fed’s FOMC was due to announce its policy changes, if any. But apart from that we were also expecting rate decisions from the RBNZ and the BoJ throughout the course of the current week.

Upcoming FX Key events:
Today: EZ CPI & unemployment rate, Canadian GDP and US Chicago PMI.
Tomorrow: UK PMI manufacturing, US ISM manufacturing.

Technical Key points:
EUR/USD is bullish, target
1.3870, key reversal point 1.3300.
EUR/GBP is neutral.
USD/JPY is bullish, target 103.70, key reversal point 92.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bullish, target
0.9900, key reversal point 0.8850. NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.

Visit RTFX for additional forex news and demo trading account information.

RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.

www.rtfx.com

Rudolf Muscat is a senior trader at RTFX Ltd.

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