5.1 Confidence crumbles as week progresses

European markets started the week on the up. The rally was sparked off by UK banking giant Barclays’ open letter which said it had made profits of more than £5.3B last year and would not have to raise fresh capital. The good vibes swept over the Channel when BNP Paribas made equally reassuring noises and ING revealed a package of support measures courtesy of the Dutch government. This growth in risk appetite led to a strengthening of the euro against the dollar and EUR/USD got a further boost from the release of positive data from the other side of the pond. US Existing Home Sales came in better than expected as falling house prices tempted buyers and investor confidence rose accordingly. EUR tested resistance at 1.33 after German business confidence was surveyed better than expected. The rise of the euro then faltered as US consumer confidence slipped to a record low. German consumer confidence came in better than expected on Wednesday and the euro climbed to test $1.33 once more. The pair started heading south in earnest after the FOMC’s monetary policy statement added little to last month’s Fed statement. Thursday’s raft of disappointing US data did little to make investor’s less risk averse and the greenback strengthened as durable goods orders, new home sales and unemployment change all disappointed. It was downhill all the way from there as Friday saw euro-zone unemployment hit two-year highs of 8%, and with the EZ inflation rate coming in at its lowest since 1999, pressure is mounting for the ECB to cut interest rates. However, ECB president Jean-Claude Trichet has made it clear that they planned to hold out at 2.00% until their March meeting. US GDP rounded off a recession-racked week by coming in at -3.8%. Although this was not as bad as many had predicted, it still marked the steepest decline since 1982 and the euro fell to test support at 1.28 and closed the week at 1.2804

Barclays bank’s reassuring open letter kicked off a week of steady strengthening for sterling, despite worries that the UK government’s £2.3B bail-out for car makers would prove insufficient. In a departure from the recent norm, UK data came in better than expected except for Friday morning’s consumer confidence which slumped close to all-time lows. The pound’s rise met resistance at 1.4350, and it fell back from this level after the FOMC’s monetary policy statement. It went on to range within 1.41 and 1.4350 before making an upside breakout at the end of the week’s trading to close just below 1.45 at 1.4491. All eyes will be on the Bank of England, which looks set to cut interest rates by at least 0.5% next Thursday.

It’s a big week for economic data with no less than 3 central banks making interest rate announcements. On Tuesday, Reserve Bank of Australia look set to cut by up to 1% to 3.35% a 45-year low. The Bank of England steps up first on Thursday and economists expect a cut of at least 50 bps to 1%. The ECB will make its announcement 45 minutes later on Thursday, with the bank widely expected to hold at 2% until March. Don’t forget that the follow-up press conference is often the big market mover.
US data includes the Purchasing Managers Index (PMI), with manufacturing numbers on Monday and non-manufacturing on Wednesday. There’s more housing data on Tuesday, with Pending Home sales. Wednesday includes the ADP jobs stats which will guide expectations for the big daddy of data releases: Friday’s Non-Farm Payrolls and the US unemployment rate.
The UK’s PMI numbers are also out this week, with manufacturing on Monday, construction on Tuesday and services on Wednesday. The action continues after Thursday’s MPC interest rate announcement with Producer Prices and Manufacturing Production in the mix on Friday.
The euro-zone is also releasing its PMI numbers on Monday (manufacturing) and Wednesday (services). German Retail Sales are out on Tuesday, with Retail Sales for the euro-zone as a whole are out on Wednesday. Friday rounds the week off for the euro with German Industrial Production.

We see more downside action for EUR/USD with resistance at 1.31 and support at 1.25. GBP/USD should meet resistance at 1.4600 and support at 1.38.

USD/JPY will most likely range within 87.00 and 93.00.

4.1 The Europeans are up against the wall: Forex Focus 26-30 January

The yen continued to strengthen as traders ran for cover. Sterling fell to record lows and some pondered if this could be the beginning of the end of the world’s oldest currency. The euro falls against the US dollar for the fourth consecutive week.

Last week’s action

The Euro opened to a double-whammy of bad news. On Monday, S&P downgraded Spain’s credit rating from AAA to AA+ and the European Commission revised its forecast for euro-zone GDP for 2009 from +0.1% (forecast in November 2008) to -1.9%. ECB President Jean-Claude Trichet confirmed the accelerating downturn and said the euro-zone’s economic outlook was “substantially” worse than what the bank had predicted only a month ago. The doom and gloom sent EUR/USD south and Tuesday morning saw it crash below 1.30 for the first time in 2009. It continued to fall as President Obama stepped up to swear in and any hopes of an Obama rally on Wall Street proved premature as the S&P 500 fell 5.3%, the largest decline on a Presidential inauguration day. Wednesday saw the pair trading within 1.28 and 1.30 as news that Portugal was the next in line to have its credit rating cut was counter-balanced by a recovery of sorts on the equities markets. US Treasury Secretary nominee Timothy Geithner gave the greenback a boost on Thursday when he opined that a strong dollar is in US interests. Thursday’s US data surveyed rising unemployment and a weakening housing sector and the dollar faltered. The euro fell further early Friday as euro-zone PMIs came in a tad less weak than expected but still at the lowest levels since records began in 1998. The pair fell to its week low of 1.2764, to recover to test 1.30 once more before closing the week at 1.2985.

Sterling had a dismal week falling to record lows against the yen and 24-year lows against the US dollar. The Royal Bank of Scotland set the tone for the week when it admitted that its 2008 losses could be as much as £28B: the biggest loss in British corporate history. This announcement came on the same day that the UK government’s latest financial sector rescue package was released to criticisms that it would not be effective. Cable dropped like a stone on this negative sentiment through Monday and the pair broke down key support at 1.4370 early Tuesday. Influential investor and financial commentator Jim Rogers added to downside pressure on the pound by urging the world to “sell any sterling that you might have” because “it’s finished”. Concern had also been growing that the UK ‘s credit rating could go the same way as Spain’s and this had brought further pressure to bear on the beleaguered currency. However, these fears might prove to be groundless according to Thursday’s report from influential credit agency Moody’s, who said that it did not think it would be revising its credit rating downwards. The UK finished the week with more bad news. Friday’s Q4 GDP saw the economy contract by 1.5% and the pound fell to 24-year lows of $1.3550, until recovering a little to close at 1.3804.

The yen strengthened against all the majors as another week of heightened risk aversion prompts more flight to the safety of the yen. After a spectacular fall as the US session opened on Wednesday, the dollar clawed back some ground due (perhaps) to the widely-held belief that the Bank of Japan will act to prevent the yen from strengthening too much. On Thursday, the Bank of Japan held interest rates at 0.1% and warned that Asia’s largest economy faces two years of recession and deflation. The bank stressed the need to get credit moving once more and announced plans to spend up to ¥3 trillion on commercial paper to achieve this. It also said it was considering buying corporate bonds with the same aim in mind. USD/JPY closed the week at 88.82

This week’s calendar notes

All eyes will be on the FOMC’s interest rate statement on Thursday. Interest rates are currently at 0-0.25% which makes a further cut unlikely. The statement should give us more of an idea of how far the Fed is ready to go to get the US economy moving. Other key US releases include news from the housing front with existing home sales on Monday and new home sales on Thursday. Thursday also sees durable goods orders numbers and the weekly unemployment claims. On Friday, we’ve got US advance GDP lined up, with the consensus forecasting a significant fall. The week also sees consumer confidence surveys from the Conference Board on Tuesday and the University of Michigan on Friday.
I’m watching German data this week as my guide to EZ action. Tuesday sees the release of the influential German IFO business surveys, Wednesday showcases German CPI and Thursday brings German unemployment change.
The UK ‘s Confederation of British Industry provides insight into UK consumer spending with their Realized Sales Index on Tuesday. On Thursday Nationwide publishes its House Price Index. I’ll also be looking out for MPC member and arch-dove David Blanchflower, who is speaking in Nottingham on Thursday. He voted for a full 1% cut at the MPC’s last outing and this speech may well prove of interest.

Forecast
EUR/USD: support at 1.2500; resistance at 1.3280
GBP/USD: support at 1.3300; resistance at 1.4000
USD/JPY: support at 87.10; resistance at 90.00

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3.1 YouTube Forex Focus January 19-23

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