Throughout the course of last week as customary (since it was the first week of the current month) we got a considerable amount of important economic data.
Apart from the manufacturing data out of Europe and the US, the week got busier towards the end with the Bank of England and the European Central Bank scheduled to make their policy communications on Thursday; even the US preliminary GDP was out on the same day. On Friday, economic data climaxed with the release of the US payrolls report.
Last week, the EUR/USD closed the fourth consecutive week in profit, as the euro gained 0.86 per cent and pushed to five-week highs at 1.3706 when seen against the USD. Despite that the currency pair looked hesitant and was unable to find the necessary momentum to resume higher into bullish territory for most of November, the bullish trend got a step-up at close on December 5.
EUR/USD rose to session highs, on December 5 around 2.30pm CET. Two major events coincided at that time: the reading for US third-quarter GDP and the ECB’s news conference. The US reported a stronger growth throughout the mentioned period, the US economy grew by 3.6 per cent compared to a previous 2.8 per cent and surpassing (by a good margin) consensus estimates of 3.1 per cent. This led to an initial decline in the EUR/USD as the USD gathered support.
Yet the effect was not very long-lived and the euro eventually recovered the lead as investors reacted to ECB President Mario Draghi’s comments. In reality, his comments suggested that the ECB may keep rates low for an extended period of time and he indicated that the EZ may face prolonged period of low inflation with inflation forecasts for 2013 and 2014 reduced lower.
Prima facie this actually leaves more space for easing measures from the ECB – hence should be euro negative. Yet the fact that the euro got support instead showed that investors were relieved that no further easing measures were announced in this most recent meeting and that the central bank decided not to resort to negative deposit rates, as yet.
US unemployment dropped to seven per cent and the US economy created 203,000 jobs in November, surpassing expectations. This improving US data and stepped-up talk from Fed officials, however, failed to see the US dollar gain significant support; in fact, a look at the US dollar index shows that the index actually declined after the significant rise seen between end October and early November. Can it be mostly due to the fact that plenty of the Fed tapering effect had been priced in so early? Or is it mostly attributable to lower liquidity as we approach the end-of-year festivities?
Whatever the case maybe, it seems that despite that most speculators had already kicked the prospect of a December taper to March 2014, these positive changes may have reignited some expectations that the Fed may engage in tapering in the Fed’s next policy meeting on December 18.
Despite a refrained upward move throughout most of November, it looks like last week’s break upwards defied gravity and now exposes 1.3823, October highs. With the trajectory between 1.3767 (the highs at the time of writing) and 1.3823 seemingly offering little or no resistance, the upside seems to be preferred. Support for the coming week should hold price moves lower in the region of 1.3582/1.3462; while to the upside 1.3823 should offer significant resistance.
Support for the GBP continues to force the GBP/USD higher with the currency pair embracing repeated fresh highs. GBP/USD has hit highs of 1.6466 up to the time of writing, levels last seen in August 2011. So far we remain bullish on this currency pair as long as the pair stays above 1.6309.
For the current week we are expecting resistance at 1.6509 for price moves higher, but to the downside, 1.6276/1.6210 should support price action.
In the former part of this week, the price for gold has kept in the range of $1,225 - $1,267.95. So far, after hitting a significant support level just ahead of June lows at $1,208.34 mid-last week, the yellow metal has managed a technical correction that looks to be eyeing $1,268. However, from these levels we are expecting a pullback. To the upside, $1,270.77 should provide significant resistance, while to the downside, $1,249.83/$1,208.34 will support price moves lower.
Upcoming FX key events:
Today: SNB rate decision, US advance retail sales.
Tomorrow: EZ employment, US PPI.
Technical key points:
EUR/USD is bullish, target 1.3823, key reversal 1.3620. 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.
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Rudolf Muscat is a senior trader at RTFX Ltd.