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Monday, 4 Jul 2011
Risk Sentiment Improving as Economic Data Releases Take Center Stage
Last week's improvement in risk sentiment was noticeable with the passage of the Greek austerity measures along with encouraging Chicago PMI and Manufacturing ISM data from the US. However, global manufacturing data was weaker in the UK, Europe, and China. Over the weekend China released disappointing non-manufacturing PMI which fell from 61.9 to 57.0, underlining the slow patch the global economy is experiencing.
USD - Improving US Economic Data Points
On the backdrop of better than expected US data releases towards the end of last week (Chicago PMI and ISM) the dollar resumed its role as the FX market's whipping boy with the dollar index falling to its lowest level since early June. The “risk-on” environment was sparked by encouraging US data releases and expectations of a positive outcome in Greece helped fuel the USD losses. The string of data releases will be tested this week with the headline risk this Friday's Non-Farm Payrolls report.
Also creating background noise will be political brinkmanship as the Obama administration attempts to hash out a deal with Republican leaders over the US debt ceiling and current budget deficit. Obama's self-imposed July 22nd deadline to raise the debt limit before the actual August 2nd deadline is quickly approaching. Bond yields have already begun to rise with the 10-year Treasury note rising to 3.20%, though this may also be a result of the conclusion of QE2 which ended last week.
The technical picture for the dollar versus the euro is also looking bleak. The weekly candlestick closed with an engulfing candlestick pattern which hints at further gains for the euro. On the daily chart the EUR/USD is slowly moving above the triangle consolidation pattern which has held the pair since late May. With rising momentum the 1.4700 resistance looks like the next target.
EUR - Headline Risk Declines with Greek Aid Approval
Euro zone finance ministers agreed to provide the 5th and final tranche of aid to Greece following last week's approval of new austerity measures by the Greek parliament. FX markets largely expected this move in order to stave off a default but Greece still requires approval from the IMF before the funds will be released. An additional bailout plan for Greece will not be finalized until September. Interestingly enough, despite the new bailout package being crafted for Greece, in comments to German newspaper Der Spiegel, German Finance Minister Wolfgang Schaeuble said Germany was shaping plans to deal with a potential Greek default.
This week the ECB is expected to raise the refinancing rate 25 bps to 1.50% as Trichet expressed last week the ECB will maintain “strong vigilance” when it comes to fighting inflation. Traders should also be eyeing Tuesday's euro zone services PMIs which could show a bit of weakness in the euro zone economy from the month of June.
As the euro continues to bounce higher the Swiss franc has been the most hurt versus the euro with the EUR/CHF coming off of its all-time low by a whopping 4%. More gains could be in store for the pair should the “risk-on” environment continue combined with a quiet front in the European debt crisis.
GBP - Slowing UK Data Headlines Sterling Risks
Last week's drop off in UK manufacturing PMI highlights the slowdown in UK growth as the index declined to 51.3 from 52 as the survey struggles to maintain a reading above the 50 level which indicates economic expansion. Q1 UK GDP climbed a tepid 0.5% and economists may be revising their Q2 forecasts' lower. Today's construction PMI is expected to show a stable reading with consensus expectations of 53.6 from last month's reading of 54.0. On Thursday the BOE is expected to hold interest rates steady given the split between those MPC members voting for an interest rate increase, no change in monetary policy, and those lobbying for increased quantitative easing measures. Currently the market has priced in the first BOE tightening to come in November but given the dire UK economic data the risks are skewed for a later start. This same risk applies to sterling given the ECB's tightening schedule and even the ultra-dovish Fed has indicated QE3 is not in the cards.
Gold - Gold Prices Back Below $1,500
Spot gold prices dropped to their lowest level in six weeks after closing Friday below the $1,500 mark. Demand for gold has fallen as increased optimism is apparent following a positive outcome in Greece and rising equity markets.
The declines in gold prices began to intensify following the approval of the Greek austerity measures by Greece's parliament and the passing of vote for asset sales and additional budget cuts. Improved US data points helped fuel stronger equity markets last week. This also contributed to the “risk-on” environment which does not favor gains for gold. US stocks surged last week with the Dow Jones Industrials Average climbing 5.4%, the index's best week percentage wise since July 2009. Investors should take the gains with a grain of salt; volumes were down last week from their average by almost 12.5% which may hints at a lack of follow-through in the equity markets. This would be a positive for spot gold prices. $1,514 and $1,557 would be the next targets to the upside though a break of the $1,4662 support would reduce the bullish sentiment in spot gold.
A bullish engulfing pattern on the weekly chart does not bode well for further gains in the pair. Combined with rising weekly and daily stochastics, a case can be made for additional gains in the EUR/USD. The first resistance level the pair should face is 1.4700 off of the June high and a move above here and the pair would encounter selling pressure at the May high of 1.4940. To the downside the upper line of the triangle consolidation pattern at 1.4515 may prove to be supportive with additional support at 1.4440 and the lower leg of the triangle which comes in at 1.4125.
The monthly chart shows potential declines for sterling. Falling stochastics point to additional losses in the pair. Traders could be looking for the GBP/USD to decline to 1.5650, a level that offers long term support. Both the 20-month moving average comes in near this area but more importantly this is where the falling trend line from the 2007/2008 highs comes in and sterling could see a technical bounce in this area. This level has further significance as it coincides with the October 2010 lows on the daily. To the upside resistance is found at 1.6150, the top of the current consolidation pattern as well as the previous trend line from the May 2010 low at 1.6280.
A triangle consolidation pattern has formed on the daily chart with the legs froming from the May high and the June low. Judging from the long term trend the USD/JPY would be expected to break lower where support comes in at 80.25. A break here would likely test 79.70 and 79.55. However, a move higher may also be in the cards and a break above the initial 81.10 resistance would target 81.75.
After forming a base near the 0.8300, the pair has risen to test its falling trend line from the February high which comes in at 0.8535, not far from the resistance level at 0.8550. Further resistance awaits the pair as the 50-day moving average. A breach here and the pair could unravel to the mid-May low at 0.8750.
The Wild Card
The pair has made a sharp 4% move higher from its all-time low but is now encountering some significant technical levels. The pair has retraced 38% from its April to June move at 1.2350. Additional resistance from the December and March lows at 1.2400 is also apparent. Forex traders may want to wait for confirmation the upside movement has finished before initiating any shorts again.