Expecting Movement From GBP, EUR and JPY

Although the FX market has been criticized for reduced volatility as of late, after concluding a week where the EURUSD recorded a further two yearly lows in addition with an 100 pip decline in the GBPUSD, USDJPY and the AUDUSD, it does appear that market movement is on the rise.

The upcoming week is dominated by economic releases from the United States, United Kingdom, European Union and Japan. As such, I am expecting further movement in the financial markets. Here’s why:

In regards to the USDJPY, the pullback encountered last week seemed to take some by surprise but it necessarily shouldn’t have. Basically, despite demand for the USD surged after the US GDP 2Q estimate surpassed expectations alongside US Initial Jobless Claims averaging the lowest number in around 8 years, the USDJPY still failed to close above 103. This level is viewed by analysts (not necessarily just myself) as a ceiling for this pair and the USDJPY’s refusal to close above 103 was likely seen as a critical rejection of the 103 level. This probably inspired investors to take profit on the pair.

This week, there is potential for JPY weakness. According to Reuters, Tuesday’s Japanese Gross Domestic Product (GDP) release is expected to showcase the biggest contraction in economic activity since the global financial crisis. CNBC are also reporting that Japan’s economy is expected to have lost all of the momentum gained in Q1, as the April sales consumption tax hike takes control of economic data.

It is being reported that Tuesday’s release will show that GDP contracted by an annualised 7.1% from April to June, down sharply from the 6.7% gain in the previous quarter. Economists surveyed from the Wall Street Journal are also expecting the same result. If the large contraction is confirmed and especially even more so if the GDP is worse than expected, JPY weakness is highly likely against all counterparts. An alarming economic release will likely reignite the debate over whether the Bank of Japan (BoJ) monetary goals are achievable, or whether additional stimulus from the Central Bank might be required. This would more than likely reignite momentum for the USDJPY bulls where resistance can be found at 102.270, 102.539, 102.798 and 103.093. It is essential to note that 103 remains a psychological level for the pair and failure to close above 103 enhances the possibility of a future pullback

As stated above and especially if the Japan GDP data is worse than expected there could be opportunities for JPY weakness against all counterparts. EURJPY resistance can be found at 137.033, 137.302 and 137.639. Similarly, the GBPJPY could have a chance to recover some of the previous weeks near 200 pip losses, with resistance located at 171.579, 172.100 and 172.640. Following Thursday’s dismal Australian employment report, the AUDJPY declined by over 100 pips and a recovery of losses would find resistance at 94.943, 95.210 and 95.394.

Before it appears as if JPY weakness might be inevitable, it is essential to point out that the expectations for the Japanese GDP release are already low and if the economic release is not as negative as predicted, the JPY could actually strengthen.

Movement should also be expected from the GBP this week. There might not be a high variety of economic releases, the news scheduled to be announced is certainly high. There might even be an opportunity for a bullish GBPUSD reversal.

On Wednesday morning, the latest UK Jobless Claims are announced and this will be shortly followed by the Bank of England (BoE) Inflation Report, where Governor Carney is expected to provide clarity on when the BoE will look to raise rates. A huge contributing factor behind the recent GBPUSD decline is due to investors losing patience with the BoE, after receiving contradictory messages from the Central Bank in regards to when an interest rate increase could be on the cards. If the correct fundamentals align on Wednesday, such as UK Jobless Claims impressing alongside a hawkish Carney indicating that the BoE are looking at raising rates soon, a bullish reversal in the GBPUSD will be swift.

In regards to the former, there is room to be optimistic for the UK Jobless Claims release. Last Tuesday’s Services PMI highly surpassed expectations, being recorded at a nine month high. Not only is the UK Services sector the largest UK GDP component, but the services sector is also responsible for employing a reported 80% of the UK labor force. Governor Carney had previously implied that a UK unemployment rate below 6% might influence the Central Banks decision to raise rates, so Wednesday’s Jobless Claims certainly has the potential to have ramifications on when a rate increase might occur.

On Monday and Tuesday, UK economic data is low. On the other hand, although United States data is not exactly high in volume the political situation in the Middle East will likely increase safe-haven demand for the USD. Therefore, it would not surprise if the GBPUSD declines throughout these two days. Potential support can be located at 1.6760 and 1.6734. If the GBPUSD bulls are going to charge out of the gates once more, Wednesday is the obvious choice. As long as the fundamentals align, GBPUSD resistance can be found at 1.6818, 16845 and if the bulls are really inspired to charge, 1.6882.

Looking at the EURGBP, although the pair has recovered losses in the past week or so, the failure to advance towards 0.80 suggests the bulls are struggling to take control. If the GBP strengthens, selling in the EURGBP will likely resume, with support situated at 0.7958, 0.7936 and 0.7917.

Speaking of the Euro, there is also a high variety of EU data released this week that will prove pivotal towards which direction the EU currency fluctuates. This includes the latest German ZEW survey (Tuesday), Euro-Zone Industrial Production (Wednesday), French GDP, German GDP, EU GDP and EU CPI (all on Thursday).

At first glance although the EU GDP and EU CPI might appear higher risk, this doesn’t mean it will create noise in the currency markets. The ECB are prepared to offer time to recently implemented stimulus measures before deciding on the possibility of further action, therefore patience could be awarded to these two releases in the event they raise eyebrows. Draghi himself appeared fairly more relaxed in his press conference on Thursday afternoon. Particularly, the manner in which he proclaimed that the EU recovery remained “weak, fragile and uneven”, alongside “the fundamentals for a weaker exchange rate are better now than a few months ago” suggests to me that Draghi himself is looking for the EU currency to decline gradually, rather than in dramatic response to a dovish comment.

To me, the German releases will be at higher risk to piling downside pressure on the EURUSD. Recent German data has shown that the German economy has been negatively impacted by the geo-political conflict in Eastern Europe. In fact, a Bloomberg survey over the weekend suggested that the German GDP contracted by 0.1% from April to June. It is no hidden secret that the German economy is seen as the spine for the EU region. An economic contraction will further weaken the EU economic sentiment, and I would expect another EURUSD 2014 low as a result if a German GDP contraction is confirmed.

At the time of writing, possible EURUSD support levels can be found at 1.3361, 1.3332 and 1.3295. If the EURUSD does experience selling and fall to the latter support level, this would represent the lowest EURUSD valuation since the 7^th November 2013.