Last week saw the majors rise sharply against the USD upon the US Fed surprising the markets with their decision to hold tapering in favour stronger economic data figures to support economic growth. The announcement saw US stocks rise with the S&P reaching new highs, whilst in the commodities markets, Gold prices also rose in response. Turning to the FX markets, majors against the USD surged between 100 - 250 pips post announcement, closing the week at the highs. Upon improvements in the Euro zone, the Euro along with yields saw higher levels, while the dollar index (DXY) rose 0.1%, finding support after economic data released post the FOMC announcement. This week sees a few important data figures among the release of figures over the coming days. This includes: CPI (Euro), GDP (Pound and Ye)n and Consumer Confidence (US). ECB President Mario Draghi is also scheduled to deliver a couple of speeches this week as well.
GPBUSD
GU commenced the week with determination, opening at 15933, over 100 pips high than the last NY close. However, it was a slow start, as indecision set in over the course of the next few days with GU trapped in a tight consolidation between 159640 and 159175, resuming lower towards 158861 (capped by 159175) on the 17th September. It was not until mid week that GU finally broke out, pushing higher to 159628, providing a signal that the market had now decided on a direction. From here, price continued to range at current levels in preparation for its next move which led to a prominent bullish marubozu (low of 159755 and high of 161120). The ascension continued higher within the next two candles, reaching a high of 161622 (76%) before meeting with resistance.
Now having broken through 160 and surging straight to 161, GU continued to maintain its position at the highs moving into the 19th September, before sellers stepped in upon profit taking. This saw GU move back to 160768 and proceed to range around current levels (38%), before descending a little lower to 160218, moving with indecision between a tight range (160162 and 160194). The 20th September saw a small attempt north, reaching 160663, but this was immediately met with rejection as sellers pushed price back to 160372 and then further to a low of 159858 just above DS1). This held as support taking price back just over 160 where price stayed until the end of the NY session, closing at 160013.
The surge in the Pound can been largely contributed not only to the FOMC announcement but to the tone of the Monetary Policy Minutes released on Tuesday which indicated that recent economic data pointed to an improvement in the UK economy and the data figures being described as "consistently stronger than market expectations". As such, forecasts were revised to 0.7% higher from 0.5% (August), based upon the latest economic data, which also saw a move in government bonds above 3%. As a result, the positive turn in the outlook for the British economy prompted the BOE to present a less dovish tone and led to the decision last week to keep asset purchases unchanged at GBP375bn for the meantime with no change to the current interest rate of 0.5%. This was in view of the three "knockout" conditions: Inflation to be contained by 2.5% within the next 24 month period, observation to continue over the indicators tied to inflation expectations and the assessment of monetary policy and its relationship to financial stability. Other data figures released earlier in the week include: Core CPI (YoY) (Aug) which remained unchanged at 2.0% (under the forecast of 2.1%), CPI YoY (Aug) which met the forecast at 2.7%, but was still slightly lower than the previous figure 2.8%, and PPI Core Output (Aug) which came in under par at 1.0% vs. 1.1%.
Taking a look at the 4 hour chart, we can see the start of GU confirming its bullish move on the 3rd September once breaking above 155991. This placed the next target at 157200 which when demonstrating its inability to hold as resistance, saw price move further north, continuing its ascension higher until reaching 158841. This then met with hesitation upon the approach of the 159 level. In the following week, the bullish trend continued, with GU opening higher with hesitation leading up to the FOMC announcement due on Wednesday the 18th September. As can be seen towards the close of the last NY session, once reaching the high of 161500, GU proceeded to fade back to 160031.
With price currently suspended above 160, this holds favourably towards the possibility for another attempt higher upon breaking above 160460. Although recent price action has seen GU retrace and cover much of the bullish breakout from 159646 as price currently sits under DP. However as GU starts to makes its way back to the upside, confirmation of a bullish continuation will be seen upon both a break above 160473 and 160663, with price supported above these levels. Should this be the case, the following levels will then come into view: 161033 (DR1), 162073 (DR2) and 162710 (DR3). However should price fall below 160460 (DP), 160048 (23%) will be the next level tested as support. A break through this level will expose the following targets: 159381 (DS1), 158798 (DS2) and finally 157780 (DS3).
EURUSD
EU opened the week at 133594, over 60 pips higher from the last NY close (132180). Following in the same manner as the Pound, it was very uneventful leading up to the 18th September, when the US Fed were due to make their announcements. While uncertainty remained, EU remained locked in a tight consolidation between 1333428 -133841, moving lower to a bottom of 133257, which kept price contained within a tight range. Upon finding support, EU then re-aligned back with the 133400 range, still maintaining an extremely restricted range of just over 20 pips (top of 133656). It was not until the 18th Sept, following the US Fed announcement, that we saw EU break with a surge of power, reacting strongly to the US Fed announcement that tapering would not commence in September as anticipated. It was an impressive move of over 140 pips upon a weaker USD, printing a prominent bullish marubozu (low of 13366 and high of 135096). This took EU to new highs that saw price maintain its bullish disposition locked at the top in a range (between 135114 – 135650) until the end of the week, closing the NY session at 135165 (23%).
As per the economic calendar, ECB President, Mario Draghi delivered a speech on the 16th September, which as expected, provided the ECB's assessment of the Euro zone's current economic condition. In this speech, Mario Draghi confirmed what much of the market already knew, which is that the euro zone’s economy was still in the early stages of its recovery. As such, in line with the other advanced countries also focused on their recovery, economic data will continue to play a key role in demonstrating improvements in economic growth, while assisting with determining the suitable timing to adjust monetary policy. However, the ECB like the US Fed, still require further evidence of improvement and as such, the ECB continue to hold the view that the euro zone economy as whole is still considered “fragile”. Therefore, economic indicators such as unemployment still need to show significant progress especially in light of inflation expectations which are expected to deliver a moderate performance in the near future. Even as the euro zone start to show improvements in data, the recovery is still considered progressive.
Currently the ECB have no immediate or short-term view to adjust interest rates despite the positive reflection in recent data indicating a transition away from the bottom. This also ties in with Draghi’s commitment to keep borrowing costs low. Therefore, while no significant action is on the horizon regarding adjustments to monetary policy, the positive is, that is there is a focus on the people and the economy has moved away from the "flashing red lights" once signalling warning bells for the potential break up of the Euro. They are now able to temper the likelihood of another major event, involving another scenario of bailouts and intervention from the IMF as seen in 2012.
However, looking at economic data, this week saw inflation reducing from 1.6% to 1.3% meeting expectations in August, while GDP figures were positive at 0.3% from -0.2% (1st quarter). This GDP figure represents the first sign of improvement after a succession of contracting quarters seen earlier in the year. However, with inflation still below the 2% target, this indicator still remains closely on watch. Looking more broadly at the macro picture, optimism has been very much influenced by the expansion in the euro zone economy recorded in June, which saw small improvements in pockets of economic data, supported by the unemployment rate, that despite difficulties in the economy, has still managed to stay consistent over the last few months. In regards to other data figures, this includes: labour costs which were up 0.9% from 1.7%, along with the ZEW Economic Sentiment (Sept) reflecting an improvement at from 47.2 to 58.6. Currently in the spotlight are the German elections which have Angela Merkel, the current German Chancellor, tipped to be appointed into a third term in office. Germany goes to polls today (Sunday).
When looking at EU on the larger times, we can see EU now positioned near the high of 137104 made on the 1st Feb, which to date has held as top resistance that has led to a steady decline down to 128 in April this year. The 128 level still holds as main support, keeping EU range bound on the higher times frames with room to move to the topside, as the 136 area comes into view (DR3). Unless prompted by a major catalyst, 137 still holds as top resistance with this level possibly targeted as for re-testing, should EU push through 136. Given the bullish momentum surrounding the Euro, it is very possible that any positive release in data may trigger the completion of this move. However, while at the top end of the price range, I would be looking closely at economic events and movements not only in the FX markets but the other financial markets, as this may also possibly inspire a move in the Euro.
While there is positives in data, a lot of uncertainty still holds not economically, but also politically and socially. So while this is being ignored, any major movement in these areas may also trigger a move in the Euro. As the ECB president has confirmed and as we know, the euro zone is still dealing with a lot of internal issues within some of their European countries (see last week's report). Combine this with the situation in Syria and movements in the US, a trigger for top resistance can be found in many sources. Therefore, any type of rejection from these high levels, may bring EU back to 132-133 rather quickly. It will be a nice break but still well within range. With price consolidating at the highs, a breakout is imminent and once direction is confirmed, a follow through to the next key levels will most likely occur with price seeking refuge in preparation for its next move.
While there is positives in data, a lot of uncertainty still holds not economically, but also politically and socially. So while this is being ignored, any major movement in these areas may also trigger a move in the Euro. As the ECB president has confirmed and as we know, the euro zone is still dealing with a lot of internal issues within some of their European countries (see last week's report). Combine this with the situation in Syria and movements in the US, a trigger for top resistance can be found in many sources. Therefore, any type of rejection from these high levels, may bring EU back to 132-133 rather quickly. It will be a nice break but still well within range. With price consolidating at the highs, a breakout is imminent and once direction is confirmed, a follow through to the next key levels will most likely occur with price seeking refuge in preparation for its next move.
AUDUSD
Like the other majors against the USD, AU started the week in positive form, opening at 93277, just over 70 pips higher than NY’s close at 92413. AU started the Asia session maintaining at current levels, moving slightly higher and reaching 93865, before hesitation towards 94 saw price pullback as sellers stepped in, pushing AU down to a low of 93166, with consistent selling over the next 4 hours. From here, price then settled around 94370 before drifting towards 94496 (23%) moving into the last day of trading. With price now sitting at the 23% level, the 20th Sept saw price break this level from 94530 to 94225, placing DS1 (9398) as the next target as AU created a low of 93770. Price quickly moved back over 94 and proceeded north with the next 3 candles, reaching 94311, which rejected sending price back down to 93763, closing the NY session at just under 94 at 93912.
According to the RBA meting notes released on the 17th September, exports have been the main support for the domestic economy with Iron-ore demand growing in the June quarter along with coal. As such, higher commodity prices have played a part in assisting the resource sector most recently. In other areas, retail sales and household consumption, reflected a mediocre performance, suggesting a level of conservative spending in the domestic economy in response to current economic conditions. On a positive note, the effects of low interests have had a stimulating effect on the housing sector as expected, along with building approvals showing an improvement in July. Shifting to employment, it has been noted that more recent figures have not reflected a significant improvement in relation to an expansion in population, which also saw a rise in the unemployment rate (last figure 5.8%).
In regards to GDP, figures have shown this to be performing below trend with expectations and this is to continue coming into the next few months. Alongside this is the expectation that mining investment will also start to decline over the next few years due to the completion of current projects. However, exportation is still seen to maintain its growth pace into the future. This is not the case with non-mining industries which fall secondary to the resource sector and are foreseen to continue with their struggle in current economic conditions. With the RBA indicating that there are no definitive plans to further cut rates in the near future, it does suggest that October is leaning more to an unchanged rate, stumping earlier speculation of further cuts in the next round of cash rate announcements. Therefore, this view will be now be re-assessed for November.
Though this will of course be dependent on the position of the domestic currency, which as mentioned previously, continues to play its role in “re-balancing” the domestic economy. Therefore, a further depreciation is still very much welcomed by the RBA while it continues to assist with providing stimulus to the economy. On the other hand, an appreciation of the AUD, or – the AUD maintaining its position at the higher spectrum of its range, may see the RBA take more consideration towards once again adjusting interest rates, should the AUD move away from providing the positive effects derived from a depreciating dollar.
With AU currently sitting at the 23% level, a move from this position will determine the immediate direction. A break above 94273 will instigate a bullish attempt with the first test level at 94386.If AU manages to break 94386, this may signal a potential long trade while price is able to maintain above board. Moving north from this level will then place the following targets into view: 94824(DR1) followed by 95752 (DR2) and then 96299 (DR3). Breaking higher from DR3 will bring forward 96450 as the next target.
Alternatively, a break through 94300 (DP) will then see the next support level sitting at 93955 (23%). A break through the 23% level will promote bearish momentum exposing the following levels: 93370 (DS1), 92811 (DS2) and 91865 (DS3). In the absence of any major domestic catalysts, keep on the look out for movement in the USD, CNY and commodities market. Also any sudden developments in the Syria crisis may also prompt a move should risk aversion set in amid concerns and fears over possible outcomes.
USDJPY
Taking the opposite side of its counterparts, UJ opened the Asia session lower at 98689 from its previous NY close 99354. Movement remained steady between a range of 98653 – 99129, before moving back north on the 17th Sept, aligning with last week’s close. UJ continued to consolidate in a tight range between 99129 – 99337 until the FOMC announcement due at the beginning of the NY session on the 18th Sept. Following the Fed announcement, UJ immediately dropped over 90 pips in response and then further to a low of 97755, where it found support. From here, UJ then reversed sharply back north to 99210 (76%), settling back around 99375. UJ continued to range at current levels moving into the last day of trading, which saw very little movement as price remained suspended at the highs, retracing back to the 76% level (99210), closing the NY session at 99217.
As mentioned previously, Japan sits in a very unique position to the rest of the world as an economy heavily reliant on exportation to sustain their economy. It has most certainly been a road to recovery for Japan who have spent much time addressing the issue of “deflation” over the last 15 years while most recently working towards achieving their 2% target announced earlier in the year. According to the latest speech given by the BOJ Governor Kuroda, Japan is progressing “smoothly” towards their objective and is recovering “moderately”. GDP figures for April-June have reflected growth, while machine orders (which for Japan is a leading indicator for business fixed investment) also saw an improvement emerging from a stagnation over the last 5 quarters. Other indicators such as an increase in consumer confidence has also been supported by improvements in wages and employment.
The BOJ have emphasized that they will continue with QQE as long as necessarily in line with focusing on their 2% target and managing their long term issues with deflation. Last week saw another round of positive economic data emerge from Japan with the Merchandise Trade Balance coming in at ¥960.3B vs. ¥1,100.8, the All Industry Activity Index showing an improvement at 0.5% vs. 0.4% and the Leading Economic Index which was higher at 107.9 vs. 107.3.
The US Fed provided the event of the week with all eyes on Bernanke and the announcement that had been the focus of the month as market participants awaited the news that the US would commence tapering their stimulus in September. It was a heavily anticipated event, that saw the majors engaged in a tight consolidation leading up the hour of the announcement. Given the constraint of the range, there was no doubt that a major breakout was imminent. The only twist being that the outcome was largely in favour of a swing towards the USD upon expectations that the US Fed would commence tapering in September, which they announced is not the plan. Apart from this, there are now other concerns circulating around the US economy over the federal budget, borrowing limits and fiscal consolidation. Also, October marks the month that the treasury is expected to its exhaust borrowing capability upon reaching its statuary debt limit.
With the view on tapering, this is certainly not off the table, but will be re-assessed in line with further signs of economic growth before the Fed look to adjust stimulus. With the major economies in recovery mode, there is a reluctance to make any bold or predictive moves without the support of stronger economic data to inspire the appropriate timing to take action.
With the view on tapering, this is certainly not off the table, but will be re-assessed in line with further signs of economic growth before the Fed look to adjust stimulus. With the major economies in recovery mode, there is a reluctance to make any bold or predictive moves without the support of stronger economic data to inspire the appropriate timing to take action.
Moving to the charts and starting with the Daily, we are seeing UJ start to slow its pace from its steep bullish climb from September 2012. Looking at July, there is a potential head and shoulders pattern formed upon UJ moving back to the 94 level, however, this was quickly rejected, resulting in a continuation of the range instead. So far the 100 level still holds a strong psychological level that will continue to attract short attempts upon approach. However, once broken to the topside, UJ will look towards 101 and 102 once again. Upon strong bullish momentum, the 103 area still holds as a top re-testing area that may or may not instigate a major rally upon it reach.
Still on the higher time frames, breaking above 103675, will see UJ promote a continuation of its bullish run whilst rejection around this area, will see UJ retreat accordingly with a lot of room south for UJ to travel down, while staying within the confinement of its range. The 94 level will need to be broken in order to accelerate a bearish move, while movement above 103 will place UJ in view of higher targets. As such, this may hold as a possible scenario, should the USD find strength. In regards to the Yen, there will be very little opposition from the Yen who favour a lower currency in order to support their export market. If anything, it is normally in the case of Yen appreciation that has seen the BOJ intervened.
Still on the higher time frames, breaking above 103675, will see UJ promote a continuation of its bullish run whilst rejection around this area, will see UJ retreat accordingly with a lot of room south for UJ to travel down, while staying within the confinement of its range. The 94 level will need to be broken in order to accelerate a bearish move, while movement above 103 will place UJ in view of higher targets. As such, this may hold as a possible scenario, should the USD find strength. In regards to the Yen, there will be very little opposition from the Yen who favour a lower currency in order to support their export market. If anything, it is normally in the case of Yen appreciation that has seen the BOJ intervened.
In regards to levels, I am looking at 99545 as a level to promote a bullish move while a break to 98915 will see UJ attempt support lower. Breaking above 99545, will first test 99662(previous day's high) and moving north from this level will place the following levels into view: 99940 (DR1) followed by 100687 (DR2) and then 100785(MR2). Breaking higher from MR2 will then bring 101758 (DR3) into view. Alternatively, a break through 98915 (DP) will expose the following levels: 98106 (DS1), then 97120 (DS2) and finally 96355 (DS3).
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