The euro stalled at the start of the week against the dollar, after failing to sustain gains above the 1.3600 level. EUR/USD slipped at the end of last week following a relatively quiet week where it flirted with the above key handle. The Thanksgiving holiday in the US hindered volatility and the most traded currency pair was unable to follow through in any direction.

At the start of this week on Monday, the single currency fell against the dollar and the pound, after extremely disappointing manufacturing PMI data from Spain dampened hopes of an economic recovery in the troubled periphery. EUR/USD dropped to 1.3526 from a session high of 1.3616.

From a technical perspective, the rise in EUR/USD seems to have run into significant resistance and the potential for a larger setback is increasing as long as the pair struggles to take out the 1.36/1.3630 level. Furthermore, given the growing diverging policy between the US Federal Reserve and European Central Bank, the outlook favours further declines for the common currency.

Forex investors will be extremely focused on GDP data from the US today, and more importantly the jobs report tomorrow.

Strong data from the labour market in the world’s largest economy would give more scope for the Fed to start scaling back its record quantitative easing program as early as this month or the next, rather than March. Recent upbeat data from the United States has raised speculation that the Fed may taper its record $85 billion quantitative easing programme.

On Monday, the ISM manufacturing PMI jumped to 57.3 versus a forecast for 55.1, proving the resilience of the economy despite indicators showing that growth in global industrial production may have peaked.

The dollar continues to be extremely buoyant against the Japanese yen, and against its commodity-linked counterparts and emerging market currencies. Greenback strength is being driven by changes in expected central bank liquidity as the Fed looks set to tighten its ultra-loose grip. While the Fed is seeing an end to cheap cash in its horizon, other leading central banks, such as the ECB and BoJ, continue to strive to come up with new ideas to provide liquidity stimulus.

USD/JPY spiked to its highest since May 22 on Tuesday before staging a mild pullback. The dollar fetched 103.38 yen just shy of six and a half month high of 103.74. On Tuesday, the pair retreated to 102.38. This may only be a temporary fix for the Nipponese currency, as the Bank of Japan seems more likely to shovel more cheap money into the economy.

A surprise drop of the US jobless rate, closer to the 7 per cent mark, may trigger a steep rise in USD/JPY. A break of this year’s high of 103.74 will see the pair accelerate above 105.

Japanese stocks rose to a six-year high at the start of the week and EUR/JPY also surged to a five-year high by 140.03. The yen has been struggling for the past few weeks versus its European counterpart despite a similar policy outlook between the ECB and BoJ, as Japanese policymakers have been more outspoken over their commitment to easy policy to end deflation. However a decision by the ECB to lower rates further on Thursday should lead to a steep drop in EUR/JPY.

The European Central Bank meeting today will be closely watched by traders. European stocks didn’t share the mood of their Asian counterparts. Stocks fell more than 1 per cent on Tuesday, as investors awaited Thursday’s ECB and Bank of England policy meetings. European policymakers stand ready to act if inflation falls further. So far, speculation is that further easing is not needed given a modest recovery together with a muted inflation scenario. Analysts talk of three sets of options which are being pondered in case the central bank decides to act. The first would be to exhaust the standard policy lever and slash rates further, which we expect to be the first response in case more action is warranted.

The second would be to re-introduce another round of LTRO (Long-Term Refinancing Operations) and the third to finally make use of the “bazooka” at President Draghi’s disposal, which is the Outright Monetary Transactions. Nevertheless, any surprise actions will send the single currency reeling against its major rivals, especially the British pound and US dollar.

Cable is trading near a two-year high against the dollar after industry reports showed construction and manufacturing activity soared in November. Recent upbeat data from Britain has spurred expectations that the BoE will implement an exit strategy from its £375 billion monthly asset purchases programme. GBP/USD touched 1.6443 this week, but should be traded cautiously to the upside, especially if the Fed beats the BoE in implementing any exit measures. EUR/GBP on the other hand may continue to slide in the near-term. A break lower of 0.8250 may pave the way for further declines towards this year’s low of 0.8086.

Upcoming FX Key events:
Today: UK BoE rate decision & asset purchases target, EZ ECB rate decision & news conference & US GDP Advance.
Tomorrow: US Non-farm payrolls & unemployment rate & Canadian net change in employment.

Technical Key points:
EUR/USD is neutral. EUR/GBP is bearish, target 0.8050, key reversal point 0.8600. USD/JPY is bullish, target 105.00, key reversal point 97.50. GBP/USD is bullish, target 1.6700, key reversal point 1.5700. USD/CHF is neutral. AUD/USD is bearish, target 0.8850, key reversal point 0.9750. 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

Emman Xuereb is a trader at RTFX Ltd.

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