Early into week start holidays in the US and the UK last Monday left their toll on price action in the forex markets, with most of the currencies hesitating to take any direction. Even Monday’s economic docket was uneventful.
US monetary policy has been, once again, subject to speculation in the recent weeks
US monetary policy has been, once again, subject to speculation in the recent weeks. Initially we had some mixed comments coming out from committee members that were first suggesting that QE could be wrapped up as soon as possible with specific time frames even suggested. This led to an invigoration of the support for the US dollar as the prospect of the withdrawal of monetary stimulus would tend to close or tighten the tap of USD supply and hence is a USD positive.
This story continued to climax in anticipation of the testimony by Ben Bernanke, the chairman of the Federal Reserve, t in front of Congress mid-last week. Given the mixed picture depicted by other Fed officials, investors were eager to see what message Bernanke would imply.
Bernanke warned that premature steps of tightening could undermine the recovery of the US economy, but he stated as well that tightening and tempering are two different concepts. He hinted that the Fed will take a step down in their pace of purchases – a clear sign that the US Federal Reserve will eventually reduce its monthly $85 billion bond-buying programme.
According to the Bloomberg Correlation-Weighted Currency Index (BCWI) the US dollar is up 5.35 per cemt year to date against its major peers. Seen against the euro the USD has seen significant strengthening throughout the months of February and March, in which period alone the USD gained around 5.57 per cent, after closing at 1.2820 at the end of March. Since then USD support eased a bit and the pair has so far consolidated around 1.29 levels.
For the current week we are expecting the EUR/USD to find support in the region of 1.2837/1.2739, while price moves higher should find resistance at 1.3016/1.3096. The currency pair is current trading at 1.2927.
The Aussie has been subjected to fleeing support especially throughout this past month. As we come to the end of May we note that the AUD has suffered overall losses of -4.37 per cent, currently marking the weakest point in these past 18 months against the euro and 12 month lows against the USD.
The Aussie has been suffering from rate cuts by the Reserve Bank of Australia (RBA) and lower commodity prices have halted investments in mining projects. In addition a more tolerant view towards Chinese growth from Chinese authorities has also dented support for the currency. The RBA slashed rates to 2.75 per cent earlier this month.
The JPY recovered some ground earlier this week as it takes a breather from its seven-month decline. Early into Monday’s session the BoJ released the minutes of the April 26 meeting.
The USD/JPY eases off the 103.73 highs made last week and in the former part of this week rose across the board on concerns that the BoJ is struggling to control the bond yields. Bond yields rose for a third week hitting highs of one per cent last week, to slip later to 0.82 per cent. The minutes released earlier this week showed that some board members were looking into improving JGB liquidity back in April and also acknowledged that the increased stimulus and inflation targeting may have been initially perceived as contradictory.
Last Thursday UK Q1 GDP was out at 0.3 per cent q/q while on the y/y basis it was out at 0.6 per cent. The readings were in line with the consensus estimates. Throughout the month of May, despite the losses against the USD and the euro, the GBP’s gains against the rest of the majors have lifted it into positive territory.
We are expecting EUR/GBP price moves higher to find resistance in the region of 0.8619/0.8686, while to the downside price should find support at 0.8462/0.8373 – the currency pair is trading at 0.8554 at the time of writing.
On Tuesday the USD/CAD drifted in the range of 1.0324 - 1.0367 as it awaited the BoC interest rate decision that was due yesterday. BoC Governor Mark Carney was due to make his last decision as the Bank of Canada Governor, before his successor takes over on June 3.
On Thursday and Friday of this week we are expecting GDP figures from the US and Canada.
Upcoming FX key events:
Today: Swiss GDP, US GDP & PCE and EZ Economic Confidence.
Tomorrow: KOF Swiss Leading Indicator, EZ Unemployment Rate & CPI and Canadian GDP.
Technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bullish, target 104.00, key reversal point 98.15.
GBP/USD is neutral.
USD/CHF is bullish, target 0.99, key reversal point 0.9518.
AUD/USD is bearish, target 0.9580 key reversal point 0.9893.
NZD/USD is bearish, target 0.7917 key reversal point 0.8312.
trading@rtfx.com
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Rudolf Muscat is a senior trader at RTFX Ltd.