Had we to sum up last week’s highlights, the limelight would certainly go to yesterday’s FOMC post-meeting announcement. In line with expectations the Fed delivered a second $10 billion cut in its asset purchases programme, trimmed equally between Treasury purchases and MBS purchases. It was the last policy meeting with Bernanke as chairman, as he now steps down and is replaced by Janet Yellen.
In the US, the annualised data for GDP Advance was out at 3.2 per cent in the fourth quarter, easing off a previous 4.1 per cent, as the US government shutdown last October left its toll. Chinese PMI data for January, albeit still growing, did so at a slower pace.
It has been an uneasy period for markets despite an overall improvement across the economic landscape and for the global recovery. Slowing growth figures out of China and the fear that US tapering would pull the plug for the capital inflows for emerging economies created uneasiness in the markets.
US equities closed January in negative territory, and in so doing registered their worse month in more than a year. The EUR/USD eased to 2.5 month lows at 1.3477 at the start of the current week, as the US dollar continued to gather support against most of its peers and the risk off mode worked against the euro.
The VIX, a widely followed gauge of investment sentiment and market volatility (often referred to as gauge of investment fear), rose to 21.44 – levels last seen in December 2012.
In Europe the PMI Manufacturing data, a health check for the respective industry, showed that for January both Switzerland and the eurozone as a whole, registered improved growth. In the US ISM Manufacturing registered a remarkable softening, easing to 51.3 from a previous 56.5.
After declines of 1.38 per cent for the EUR/USD, throughout the course of last week the currency pair slipped to lows of 1.3479. Early into this week’s session the euro attempted a modest recovery (up 0.24 per cent at the time of writing).
The currency pair continues to slip lower this year, in line with our target of 1.33 within this first quarter. For the current week we are expecting price action to tend mostly lower while below the 1.3561 – 1.3602 region, aiming for 1.3405. After which a recovery to 1.3602 – 1.3642 could be in the cards.
The single currency wasn’t helped by the softer reading for EZ inflation released last Friday. In January EZ CPI eased to 0.7 per cent from a previous 0.8 per cent. The threat of deflation weighs on euro performance especially days ahead of an ECB rate decision.
Early into the current week the GBP lost ground against both the euro and the USD. Investors had to deal with a modestly softer January PMI Manufacturing data out of the UK seemingly weighed on the GBP even though the figure was still robust at 56.7.
At the time of writing the GBP is shedding -0.87 per cent against the US dollar, as it slips to session lows of 1.6257. The GBP is giving back the gains made since mid-December. EUR/GBP is currently trading at 0.8291 completely offsetting the gains made by the pound throughout the course of last week.
For the current week first support at 1.6369 has already been broken, GBP/USD now faces second support at 1.6299. To the upside expect resistance between 1.6567 – 1.6695, to cap moves higher.
Early into Tuesday’s session the RBA left interest rates unchanged at 2.5 per cent and no further cuts were imminent. The Aussie enjoyed a relief rally as the Australian central bank sounded less dovish and softened its rhetoric statements for future rate cuts and that the AUD was overbought.
The AUD/USD enjoyed a 150-pip rally from opening levels, as the AUD gathered support early into Tuesday’s session. The currency pair is currently trading at the price of 0.8903 and has brushing past the resistance zone of 0.8825 – 0.8899 set for the week.
The overriding trend remains so far bearish. To the upside 0.8967 should offer first resistance, while to the downside a break of 0.8663 should open the door to further bearishness. Overall the Aussie has lost 2.18 per cent to the USD, in the first month of the year.
Investor focus throughout today and tomorrow will shift to high impact data out of Europe and the US. Today both the ECB and the BoE are due for a rate decision, while tomorrow the US payrolls data is out.
Upcoming FX key events:
Today: ECB & BoE rate decisions.
Tomorrow: US nonfarm payrolls and Canadian unemployment.
Technical key points:
EUR/USD is bearish, target 1.3300, key reversal point 1.38. 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 0.8580, key reversal point 0.9160. NZD/USD is neutral.
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Rudolf Muscat is a senior trader at RTFX Ltd.