12.1 More dollar weakness anticipated

Forecast:

EUR/USD; support: 1.3500, resistance: 1.4170.
GBP/USD; support: 1.4200, resistance: 1.4700.
USD/JPY; support: 95.00, resistance: 98.00
EUR/CHF: continue to look for buying opportunities ±1.51
EUR/GBP: look for buying opportunities after clear break out of 0.9500

Calendar notes:

Monday is fairly quiet with only US existing homes data (14:00) and Japan’s Monetary Policy Committee Meeting minutes (23:50) being of note.
Tuesday opens with the monthly raft of PMI data from the euro-zone (08:00-09:00). Mervyn King (Governor of the BoE) noted last week the importance of inflation in monetary policy decisions so the UK’s CPI (09:30) and the BoE’s quarterly inflation report (09:45) could well move the market. Tuesday is also alive with central bank speakers. Ben Bernanke (Chairman of the Fed) testifies to the house on AIG (14:00) along with US Treasury Secretary Tim Geithner. Later the same afternoon, Mervyn King steps up to testify to the UK’s House of Lords (15:30). Next, it’s the turn of Jean-Pierre Roth (Chairman of the SNB at 17:15), with the BoE’s Cassandra-turned-prophet, David Blanchflower, rounding the day off in Cardiff (18:30).
Wednesday lines up the influential German Ifo Business Climate Index (09:00), followed by US Durable Goods Orders (12:30) and more US housing numbers with New Home Sales (14:00).
Nationwide is due to release its UK Housing Price Index from Thursday (26 Mar-31 Mar), while UK Retail Sales (09:30) will give us the latest on the direction of the UK economy. Over the Atlantic we have US New Unemployment Claims and the final US GDP numbers (both at 12:30). Yen-watchers should listen out for Japan’s CPI (23:30) and Retail Sales (23:50).
Friday brings the UK’s Current Account and final GDP numbers (both at 09:30). This is followed some 30 minutes later by the euro-zone’s Industrial New Orders (10:00). In the run-up to the US open, we have US Personal Spending and Personal Income data (12:30) and the University of Michigan’s revised Consumer Sentiment (13:55) to set the tone of the session.

Last week’s action:

The euro started the week with a calm and steady strengthening against the greenback as investor confidence grew in the wake of the previous Saturday’s G20, followed by Fed chairman Ben Bernanke’s appearance on the CBS show 60 minutes on Sunday evening. Mr. Bernanke told the show he could see some ‘green shoots’ of recovery, and that the US should be able to rise out of recession sometime this year as long as the financial sector finds a sound footing. On Tuesday the euro got further support when key ZEW economic sentiment numbers came in better than expected and eur/usd continued to trade around 1.30. Better than expected US inflation numbers Wednesday lunchtime boosted the euro to test 1.31, but the atmosphere of calm was only really disturbed with the FOMC statement later the same day. Although the Fed held rates at less than 0.25% as widely expected, the announcement that they would be buying $300B of longer term Treasury bonds sent the stock market soaring and triggered violent moves in other markets. The euro jumped 400 pips immediately after the news to test 1.35 by the close of US trading. Thursday saw the unified currency power on to 1.37 against the greenback helped by better than expected US job numbers and manufacturing data. The euro retested 1.37 on Friday before correcting to close at 1.3581.

Monday’s feel-good factor saw sterling rise to 1.42 against the dollar. The pair fell to test support at 1.40 on Tuesday and then crashed down through this level to the week’s low of 1.3842 on the release of horrendous UK job numbers on Wednesday. However, the Fed’s aggressive quantitative easing saw the pound rise to 1.43 against the greenback. After testing support at 1.42 on Thursday, the European and US sessions took the pair up to the week’s high of 1.4595 with the Fed’s action still causing waves. Friday saw the pair retest resistance at a tad below 1.46 before closing the week at 1.4460.

10.1 UK banking fiasco could push euro to strengthen against sterling

Last week's wrap:
The euro opened the week by gapping down with the on-going atmosphere of risk aversion, disappointment over the non-event that was the European crisis summit and anticipation of an almost certain ECB rate cut on Thursday all adding to euro weakness.
The Reserve Bank of Australia’s decision to hold interest rates at 3.25% early on Tuesday surprised many and led to a temporary respite in risk aversion. This buoyed the euro, which tested 1.2675 before falling back in the opening hours of London trading. The Bank of Canada struck a less optimistic note later the same day. The central bank cut its rates 50 bps to 0.50% and hinted it would provide additional financial stimulus through credit and quantitative easing if required. This Canadian caution seems justified. Terrible US housing data brought further downside pressure onto the 16-nation unit and, when Australian GDP came in at -0.5%, EUR/USD hit its week low at 1.2456. The euro recovered as China’s official PMI saw manufacturing in the People’s Republic grow for the third month running. However, when a much-anticipated announcement of a fresh stimulus package from the Chinese government failed to materialize, the euro started the march south once more. Thursday’s run up to the ECB’s interest rate announcement saw more bad news out of the European powerhouse as German retail sales fell unexpectedly. The ECB cut by 50bps to 1.50% as expected and when the bank’s president, Jean-Claude Trichet, would not rule out further cuts the euro fell to 1.2480. However, the bank now seems to accept the urgency of the situation and expressed its readiness to act, so the euro could (just could) be turning the corner. Friday was NFP day. The data showed that US employers had cut more jobs than expected and the unemployment rate rose to a 25-year high. Nevertheless. although you might expect the dollar to strengthen on risk aversion, EUR/USD leapt above 1.27 during the hour after the publication of the numbers. Bloomberg put the rise down to the fact the pace of the cuts was slowing down, but perhaps it marks a shift in underlying dollar sentiment – only time will tell. The euro went on to weaken as the US session progressed and closed the week at 1.2634.

Sterling spent the week ranging between 1.43 and 1.40 and essentially tracked the euro’s ups and downs. GBP/USD fell to 1.3983 to reconfirm strong support at 1.40, on the release of Australia’s disappointing Q4 GDP. Thursday saw the Bank of England cut rates 50bps to 0.50% as expected with the central bank promising that it would now boost the money supply in a bid to revive the economy. Although the UK media widely misinterpreted this as a bid to print money, cable found support at 1.4050 after the news and then went on to recover. The pair tested 1.43 immediately after Friday’s US job numbers before closing the week at 1.4070. News broke on Saturday that the UK government is going to underwrite £260B of Lloyd TSB’s risky assets. This move will give the British government a 75% stake in the group and would not have been necessary if the bank had resisted government pressure to merge with stricken bank HBOS last September. It looks like sterling is in for a rocky ride this coming week.

Calendar notes
It promises to be a relatively quiet week in terms of economic data.

US: Tuesday sees Fed Chairman Ben Bernanke delivering a speech about financial reform. There’s the federal government budget balance on Wednesday, while Thursday has retail sales numbers and new unemployment claims lined up. Friday brings the US trade balance and the University of Michigan’s preliminary consumer sentiment.
Euro-zone: Expect important data out of Germany including the trade balance on Tuesday, producer price inflation and factory orders on Wednesday and industrial production on Thursday. The ECB monthly bulletin is also released on Thursday as is the euro-zone’s PPI. Friday 13^th sees EZ retail sales.
UK: Retail sales and house price numbers kick things off for the UK in the early hours of Tuesday. The trade balance will be released on Wednesday.
Japan: Keep your eye out for Japan’s final GDP, which is expected to be revised down.
Switzerland: The Swiss National Bank is expected to cut rates another 25bps to 0.25% on Thursday afternoon.
New Zealand: The Reserve Bank of New Zealand is expected to cut its interest rates 75bps to 2.75%.

Forecast
EUR/USD support: 1.2330; resistance: 1.2730 with an upside breakout seeing further resistance at 1.2830.
GBP/USD: support 1.3525; resistance 1.4300
USD/JPY: support 94.50; resistance: 99.70

EUR/GBP: The Lloyds TSB fiasco could well push this pair to an upside breakout of 0.9000. You’ll find some technical background on this here.

8.1 Gloomy week cues up another wave of risk aversion

It was a mixed week on the currency markets. The greenback strengthened on all fronts when the week got underway as bad news out Asia and Europe increased demand for the US dollar. The final days of trading saw a turn-around as fears that Citigroup and Bank of America were heading for nationalization sparked wide-scale dumping of the US currency.

The euro started the week’s trading by gapping down 90 pips, opening at 1.2808. It tested resistance at around 1.28 through President’s Day, before heading south in the early hours of Tuesday to find the week’s low of 1.2512. The euro then recovered to hit the week’s high of 1.2877 late Friday, before closing at 1.2835.
The euro’s early decline must be seen from the perspective of the euro-zone’s very disappointing data of late (remember those appalling GDP numbers released Friday 13^th?). This week’s developments have fed fears that the 16-nation currency is facing a battle for survival as the global recession bites. On Tuesday Moody’s flagged concerns that a collapse in the economies in Eastern Europe could have a negative impact on Western Europe’s banking giants. On Wednesday, the European Commission called on euro-zone members France, Greece, Spain, Ireland and Malta to get their houses in order by reducing their budget deficit to 3% or less as required by the EU’s Stability and Growth pact. However, the difficulties that these countries would face if they tried to cut back on spending were amply illustrated this weekend in Dublin. 100000 people marched through the Irish capital to protest against how their government is handling the economic crisis. Friday afternoon saw a reversal in EUR/USD fortunes after the head of the Senate Banking Committee told Bloomberg that he was worried that the Bank of America and Citigroup could be nationalized ‘at least for a short time’. The euro soared to above 1.2850 until White House spokesman Robert Gibbs said in a press conference that the administration believes that a well-regulated privately-held banking system was correct the way to go.

GBP/USD gapped down more than 150 pips when it opened the week at 1.4228. It spent most of the ranging between 1.41 and 1.43. It broke out of this range on Thursday and hit the week’s high (1.4482) on Friday afternoon, before closing the week at 1.4425.
Sterling received support on Tuesday on the news that consumer price inflation fell less than expected to 3.0%. Mervyn King, governor of the Bank of England, said he was still concerned about deflation and that the Bank may have to create more money (known as ‘quantitative easing’) and pump it into the economy to prevent inflation from falling below the banks inflation target of 2.0%. Wednesday’s release of the Monetary Policy Committee meeting minutes revealed that the committee had voted 8-1 to cut interest rates by 50bps last meeting. The committee’s one dissenter, arch-dove David Blanchflower, wanted to cut by a full 100bps. The committee voted unanimously to seek approval from the government to start quantitative easing soon.

A week of gloom for Japan opened with the news that the country’s GDP had slumped by 3.7% in Q4 2008. Japan’s economy minister, Kaoru Yosano said that Japan was facing its worse crisis since the Second World War. On Tuesday, the finance minister, Shoichi Nakagawa resigned amidst allegations that he had been drunk at the G7 meeting the weekend before.
The greenback spent the week on the up against the yen, hitting the week’s high of 94.45 on Thursday before falling back to close the week at 93.01

Calendar notes
The economic calendar promises to be fairly lively this week.
News from the American housing front comes on Wednesday with Existing Home Sales and on Thursday with New Home Sales. We get a snapshot of economic performance in the US regions with Tuesday’s Richmond Manufacturing Index and Friday’s Chicago PMI: while Thursday’s Durable Goods Orders and Friday’s GDP give us an insight into the nation’s performance as a whole. The Conference Board’s Consumer Confidence Index is released on Tuesday and is followed up by the University of Michigan’s Consumer Sentiment Index on Friday. The Chairman of the Federal Reserve, Ben Bernanke, is testifying to the Senate on Tuesday and the House on Wednesday.
Highlights out of the euro-zone include German IFO numbers on Tuesday, the euro-zone’s Industrial New Orders also on Tuesday and its CPI on Friday.
On Tuesday, the Confederation of British Industry releases its monthly Realized Sales index, a survey of the sales of wholesalers and retailers. The UK’s revised GDP will be published on Wednesday, and the Nationwide Building Society’s House Price Index is due out on Thursday. The Governor of the Bank of England, Mervyn King, will be testifying to Parliament on the banking crisis also on Thursday.

Forecast
EUR/USD is still in a downtrend and could well fall back to 1.25 this week.
GBP/USD will continue to range between 1.41 and 1.46.
USD/JPY should find support at 91 and resistance at 94.5.