FXTM’s Weekly Review – USD profit-taking strikes again

EURUSD – Germany avoids recession

The EURUSD spent the majority of the week consolidating between 1.2418 and 1.2994. There was a sigh of relief around the Eurozone when it was declared that Germany had avoided a recession, and with French and EU GDP figures also announced stronger than expected, the EU economic sentiment received a much-needed boost. It should be noted that stronger GDP figures were not the catalyst behind the EURUSD rally on Friday, with late night USD profit-taking being the reason behind the EURUSD concluding the week above 1.25. The pair even fell as low as 1.2398 on Friday afternoon, with robust US Retail Sales increasing demand for the Dollar.

In regards to what is next for the Eurodollar, there remains an upside risk that a dovish FOMC Minutes release on Wednesday evening could lead to the EURUSD attempting to surpass 1.25. Unless widespread US Dollar profit-taking is forthcoming, no runs beyond 1.26/1.27 are expected anytime soon. Aside from the German ZEW Survey on Tuesday, economic data from Europe is low during the beginning of the week. Therefore, any noticeable fluctuations in the Eurodollar valuation would be correlated to demand for the Dollar.

From a technical standpoint on the Daily timeframe, the Eurodollar is continuing to trade in the same bearish direction it has done for months, with there being no indications this will conclude anytime soon. The 1.2570 price has previously acted as stubborn resistance for the EURUSD, and it would require further USD profit-taking for the pair to surpass this level and advance towards 1.26.

The pair consolidating around 1.25 is a possibility, while it would probably require an unexpected hawkish Fed comment or investors to price in further ECB stimulus measures for the pair to seek support around 1.2480 and 1.2439.

GBPUSD – Carney drops the Cable

The Cable tumbled to 1.5607 on Friday afternoon, its lowest valuation since early September 2013, following a dovish Bank of England (BoE) Inflation Report on Wednesday encouraging investors to continue closing Sterling positions for the remainder of the week. It was always likely that the BoE downgrading economic projections alongside signaling that no rate rises anytime soon would have bearish implications on the GBP, but it was the Bank’s admission that inflation would fall below 1% within six months that unsettled the markets. Overall, the general consensus at present is that previous optimism there could be an interest rate rise in Spring 2015 is just wishful thinking

With the Inflation Report leaving investor appetite towards the Sterling crumbling, investor attraction towards the GBP is not expected to return for some time. As has been the case for the past couple of weeks, any noticeable GBPUSD moves to the upside is likely to be due to US Dollar profit-taking encouraging risk appetite in the currency markets.

Although it is not expected that either of the two dissenters within the Monetary Policy Committee (MPC) switched their votes last month, BoE Governor Carney again reiterating strong views on weak price pressures or slowing economic momentum during Wednesday’s release of the BoE Minutes could pressure the Sterling. Aside from an unexpected hawkish Fed comment intensifying demand for the Dollar, the major downside risk for the Cable is Tuesday’s inflation report. Even though the BoE suggested UK CPI would fall below 1% within six months, CPI is already at 1.2% and with PMIs (Services) slowing more than expected coupled with the drop in commodity prices, UK inflation may even be announced below an annualised 1% as early as this week.

In reference to the technicals on the Daily timeframe, investors closing USD positions on Friday evening have allowed the pair to navigate itself back inside the wedge pattern. To continue trading within the wedge pattern, further consolidation is required. Potentially weak UK CPI on Tuesday would most likely inspire further GBPUSD selling and lead to the downside moves towards the 1.5662 and 1.5618 support levels. As mentioned above, no increased appetite towards the GBP is expected but further USD profit-taking would encourage the pair to advance towards resistance around 1.5780.

USDJPY – A new seven-year high

An unexpected emergence of reports speculating that Japanese Prime Minister Shinzo Abe was considering calling a snap election and postponing, or cancelling altogether an unconfirmed sales tax for next year, inspired the USDJPY to advance to two new seven-year highs last week (116.096 and 116.818). These rumours continued to dominate headlines throughout the week and actually took the shine away from impressive Japan Machine Orders which increased by an annualised 7% during September. The Machine Orders performance suggests consumption expenditure is now returning to the Japanese economy, which also suggests another sales tax in 2015 might be possible after all.

The upcoming week is busy for the pair, and news in early trading today that Japan has fallen into a recession will encourage further speculation that next year’s sales tax will be postponed – which will pressure the JPY. At the same time, these reports are still rumours and if they turn out to be inaccurate this would likely lead to the JPY recovering losses.

Investors should also keep a very close eye on US Inflation (Thursday) and the FOMC Minutes (Wednesday). Particular attention is needed for the FOMC Minutes, because any indications the Fed are uneasy with the higher appreciated Dollar would encourage additional profit-taking.

Last week, a lot of attention was focused on the “1.20 trade”, with speculation that both the EURUSD and JPY may finish the year at 1.20. If Fed policy makers appear hawkish and begin to indicate that talks regarding a US rate hike are elevating within the FOMC, then the likelihood of this is more possible. However, if the Fed decides to weaken demand for the USD, then the chances of the “1.20 trade” becoming a reality is limited. Investors must remember that for this trade to be successful, demand for the USD must remain intact, with weakness to either the Euro or JPY probably not enough to drive the pairs towards 1.20 on its own. USDJPY Upside moves would find resistance around 116.284 and 117 while support can be found at 115.551 and 115.

Gold – Back above $1180

Robust US Advance Retail Sales on Friday afternoon pressured Gold into extending below its short-term consolidation triangle and finding support around $1145. Investors closing USD options later the same afternoon encouraged a bullish reversal, with Gold concluding the week at $1188.

The upcoming week is heavier with US economic releases, and Gold investors should continue keeping a close eye on demand for the USD. The higher risk economic releases at first glance appear to be the FOMC Minutes (Wednesday) and US Inflation for October (Thursday).

It should be noted that Gold has just surpassed the previously psychological $1180 support level (this time as resistance), which suggests that Gold bulls maybe attempting an upside rally after the bears took control of Gold’s direction in recent weeks. A dovish Federal Reserve comment on Wednesday evening would represent Gold’s best chance to push above $1200. At the same time, an unexpected hawkish comment would accelerate demand for the USD and send Gold back down to $1150.

The long-term perspective for Gold remains bearish but potential short-term swings higher could find resistance around $1195, $1208 and $1215. Downside momentum would find support located around $1173, $1161 and $1161.

Silver – A return to $16

Silver was having a relatively quiet week, with the metal spending the majority of the time consolidating between $15.75 and $15.44. Soft Chinese economic data also had no noticeable impact in the Silver markets.

Volatility for Silver accelerated on Friday, when stronger than expected US Advance Retail Sales increased demand for the US Dollar and subsequently encouraged a sell-off in metals. However, investors closing Dollar positions later in the afternoon encouraged a reversal, with Silver concluding the week at its highest valuation in a fortnight ($16.29).

Looking ahead to next week, silver investors would be mindful to pay attention to the FOMC Minutes release on Wednesday. If the Dollar profit-taking on Friday afternoon was linked to investors being suspicious the FOMC Minutes will be perceived as unexciting, a dovish FOMC minutes release still has the potential to encourage Silver to appreciate towards $16.52 and $16.71. At the same time, an unexpected hawkish comment would lead to a surge in demand for the USD and subsequently pressure metals. This could also encourage a reversal of Friday’s gains, and send Silver back towards support at $15.74, $15.52 and $15.25.

Brent Oil – Continuing to decline

Brent Oil continued to slide down the charts last week. This followed repeated concerns over an oversupply of Oil and increased USD demand encouraging investors to continue selling. Comments from Saudi Arabian Oil Minister Al-Naimi indicating that Saudi Arabia would not be prepared to cut supply ahead of the highly anticipated OPEC meeting later this month also contributed to Brent’s steep decline. Investors closing USD positions on Friday afternoon led to a pause in selling, with Brent Oil registering its first daily gain in a week and concluding trading just shy from $80.

Looking ahead, there are two events that will likely encourage volatility in Brent Oil. These are the FOMC Minutes (Wednesday) and OPEC Meeting (27th November). If a major oil producer suggests before the OPEC meeting that it would be willing to reduce its production of Oil, it would represent the strongest possibility of Brent recovering a proportion of its recent heavy losses. Similarly, if the FOMC Minutes stalls demand for the Dollar, a consolidation in the Brent Oil price is possible. A hawkish comment would be unexpected, but if it did occur it would probably lead to Brent Oil resuming its downhill tumble.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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