As investors remain fixated on events in Europe FX traders may overlook an important Fed meeting. If the euro zone succeeds in restoring some sense of stability investors could begin to refocus their attention on the loose monetary policy of the US and a weakening USD.
Forex Market Trends
USD – Fed Meeting Slips Under the Radar
While events in Europe have captured the attention of both financial markets and the media, investors may overlook an important Fed meeting this Tuesday. The long term trend in the currency markets has been a weakening USD and the primary cause for this has been a loose US monetary policy something the Fed is unlikely to change anytime soon.
There has been a trend of stronger US data over the past two months with manufacturing production rising 0.7% m/m in October, core durable goods rising by 0.7% m/m and retail sales up 0.5% m/m. Consumer confidence has risen sharply and PMI surveys have moved above the 50 boom/bust level.
Despite the better economic data there are two reasons why the Fed will continue on a path towards additional quantitative easing; stagnant US unemployment and a European economy that is slipping towards a recession. Last month’s +120k NFP report was a step in the right direction but a one-off payrolls report does not break a 2.5 year trend of weak US employment. With the ECB lowering its growth forecasts and now predicating 2012 GDP between -0.4% and 1.0% the threat of a euro zone recession weighing on the US economy is real. Until employment data begins to show a strong turnaround, we can expect additional moves by the Fed to support the US economy with more asset purchases.
EUR – Chinese FX Investment No Quick Fix
The announcement of an FX Chinese investment fund designated for European assets helped the EUR come of its lows on Friday after the disappointing ECB meeting and lackluster EU economic summit. However, additional Chinese money does not change the facts on the ground and leaves the EUR vulnerable to further declines.
Comments from the Bundesbank expressing the German central bank is open to the idea of increasing the funds made available to the IMF were EUR supportive and gave the EUR a temporary lift. I’m surprised by the market’s reaction to this news given Draghi’s comments from the ECB press conference, “It’s legally complex. The spirit of the treaty is that one (ECB) cannot channel money in a way to circumvent the treaty provisions…If the IMF were to use this money exclusively to buy bonds in the euro area, we think it’s not compatible with the treaty.”
As the market reacts to the news flow from Europe the EUR/USD continues to make lower highs and lower lows. This type of price action is typically considered bearish by technical analysts.
AUD – Weak Employment Data Means More RBA Easing
Last week’s release of disappointing unemployment data from Australia opens the door for further easing of Australian monetary policy. The employment change showed the Aussie economy shed -6.3k jobs in the month of November. Expectations were for an increase of +10.3k. The October numbers were revised higher to +16.8k from +10.1k though the upward revision did little to offset the headline data. The unemployment rate also unexpectedly ticked higher to 5.3% from 5.2%.
The weak unemployment data adds additional room for the RBA to cut rates for the thirds consecutive time when the RBA meets on February 7th. The Aussie central bank could lower interest rates another 25 bp. Currently the Australian interest rate stands at 4.25%.
The near-term technicals do not bode well for the AUD. Last week the AUD/USD failed to make a close above the 1.0340 resistance level from the mid-November high. Daily stochastics are falling and the pair has support at its 20-day moving average at 1.0050 followed by the November low of 0.9660.
Gold – Spot Gold Prices Ease
The price of spot gold continues to struggle in this risk-off environment as the commodity has been unable to break its recent trading range. One reason for the consolidation may be lower inflation in China and reduced growth forecasts from India. The two Asian nations make up a healthy portion of global demand. Also contributing to the lower gold price is a strengthening USD. The USD index (DXY) is just off of its November high as the USD has once again shown to be the safe haven currency of choice.
Technicals show spot gold prices have failed to make a move above the falling trend line from the September high which comes in today at $1,749. The commodity has support at the rising support line from the September 29th low which is found at $1,668. The next support is October 20th low of $1,607.
The 20-day moving average is now at 1.3420 and has served as a significant resistance level with the EUR/USD last closing above this line on November 3rd. While weekly stochastics are beginning to look oversold the monthly stochastics still have room to move lower. With the downtrend firmly entrenched the supports from the November low of 1.3260 and the October low of 1.3145 are within striking distance. A move higher may find willing sellers at the December high of 1.3550 and the November 18th high of 1.3610.
Sterling has been caught in a range trading environment between the levels of 1.5780 and 1.5660 where the 55-day moving average is found. With daily and monthly stochastics moving lower the November and October lows of 1.5420 and 1.5270 look to be within reach. Resistance for the GBP/USD can be found at the November 18th high of 1.5890 followed by the falling trend line from the August high which comes in at 1.5925.
The doji candlestick from December 8th stands out as the day’s low coincides with both the 55-day and the 100-day moving average. This may be the start of a base being formed for a test of the June 2007 trend line which comes in at 78.50. A break here will expose the post-intervention high of 79.50. To the downside the November 18th low of 76.55 is the last support prior to the pair’s all-time low at 75.56.
The pair continues to struggle to overcome the 0.9330 resistance level despite multiple attempts to move higher. A concerted move higher may find resistance at the 20-month moving average of 0.9380 followed by this year’s high of 0.9780. The downside may be capped at the support of 0.9065 which coincides with the pair’s 55-day moving average. Additional support is located at the November low of 0.8760.
The Wild Card
The EUR/CAD dropped 600 pips with 10-consecutitve days of declines before moving higher to 1.3710. This price has important technical implications as it is the 38% Fibonacci retracement from the aforementioned decline. The price is also the previously broken support line from the October to mid-November consolidation. Forex traders should note that previously broken support lines often turn into resistance levels. The EUR/CAD looks to have support at the December 8th low of 1.3475 and 1.3400 from the September low.
Written by Forexyard.com