Currency traders longing for moves to capitalise on must have welcomed the market moving data coming out of the world’s largest economy towards the end of last week. Last Thursday, the US published its annualised GDP figure for the third quarter of the current year – the actual figure was out at 2.8 per cent; an important figure in itself, but can probably be better appreciated when considered against a previous 2.5 per cent and consensus expectations of 2 per cent.

On Friday, better-than-expected news continued to flow out of the US, with the US labour sector flaunting the creation of 204,000 new jobs compared to the previous 148,000 and way ahead of consensus expectations of 120,000.

The data, as can be expected, lent support to the US dollar because it bode well for the recovery of the US economy, but stronger data also implies that the Federal Reserve is more likely to, at some point, have to face first an unwinding (or probably, as most commonly known, tapering) of its current massive asset purchases programme.

The US was not the only major economy to report important data. Last week, the ECB was due for its November policy rate decision, and as ECB President Mario Draghi (nicknamed Super Mario for his ability to surprise and to show credibility) can do, the European Central Bank caught investors by surprise by delivering a 25bp cut, bringing the policy rate down to 0.25 per cent from a previous 0.5 per cent.

The actual rate cut was being expected really, but markets had priced in a later move.

Back to the currency markets, the EUR/USD had to face the music as these major events or data were announced. After price action was mostly range-bound for this first part of November (mostly trading between 1.3460-1.3540), on November 7, the EUR/USD precipitated, first to 1.3354 (from 1.3505 pre-data) as the ECB announced its rate cut, with the move lower extending to 1.3295 less than an hour later as US third quarter GDP was announced.

The following day, the headwinds were not over for the most liquid currency pair: EUR/USD slipped to 1.3318 after it had recovered highs of 1.3437 earlier into Friday’s session. Friday’s move was the result of the better-than-expected US payrolls data.

At the time of writing, the EUR/USD is trading at 1.3435; for the current week we are expecting upward moves to find initial resistance between 1.3434 and 1.3461. To the downside, the following supports should cap price moves lower: 1.3318-1.3362.

On the daily time frame, we’ve seen a break of the bullish trend line that has been building up since July 9, 2013. Since November 7, the currency pair has been unable to recover back within this bullish trend line.

Looking forward, the soon-to-be Fed chairman Janet Yellen faces a confirmation hearing later today; potentially dovish comments from Yellen could again translate into headwinds for the US dollar.

In the former part of the current week the JPY was a loser across the major currencies. The USDJPY hit eight-week highs at 99.79 as the currency pair continued along the bullish trend seen on a daily time frame and throughout most of 2013.

The USD/JPY tends to be driven by yield differences and this renewed support for the USD against the yen (due to the stronger-than-expected US GDP and payrolls data) was in sync with the widening of the yield difference between 10-year US treasuries and the 10-year Japanese Government Bonds, as the difference between the two yields widened to the highest since 2011.

Up to the time of writing, the GBP/USD has slipped to lows of 1.5854, in so doing erasing the gains made in the earlier part of November. The currency pair has been range-bound since September 18 this year; to the downside the daily closes have found significant support at 1.5922, a daily close below this level could open the door to more bearishness.

CPI data issued last Tuesday showed that inflation eased to 2.2 per cent from a previous 2.7 per cent, and the British pound reacted negatively as interest expectations will likely reflect the tamer inflation numbers.

Lower inflation eases the pressure on BoE and will likely give the British Central Bank more time before switching to interest rate rises – thus giving it the time to make sure that the recovery is on a secure footing.

Upcoming FX key events:
Today: German and EZ GDP, UK retail sales, Janet Yellen’s confirmation hearing.
Tomorrow: EZ CPI and US empire manufacturing and industrial production.

Technical key points:
EUR/USD is neutral. EUR/ GBP is neutral. USD/JPY is bullish, target 103.70, key reversal point 97.50. GBP/USD is neutral. USD/ CHF is neutral. AUD/USD is bullish, target 0.9900, key reversal point 0.9280. 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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