6.1 Risk appetite increases as traders anticipate Obama’s stimulus package.

Last week saw investor confidence rise as shocking US jobs data fed hopes that Barack Obama’s financial stimulus would soon be passed. The dollar weakened against most currencies except the yen as traders left safe havens in search of riskier assets.

The euro closed the week up against the dollar for the first time in six weeks. Good news out of the US, including better than expected manufacturing PMI and Pending Home Sales, improved risk appetite and gave the euro a boost on Monday and Tuesday. However, the 16-nation currency stumbled on Wednesday as the Fitch international rating agency downgraded Russia’s credit rating to BBB. Russia is a significant partner of the euro zone and the deteriorating situation in the world’s largest country can only spell trouble for Europe’s economic health. The euro continued to fall through the afternoon, as discouraging US job data gave the market the jitters as it looked forward to Friday’s Non-Farm payrolls. The ECB met market expectations by holding interest rates at 2.00% on Thursday. Jean-Claude Trichet followed up the announcement by signaling that the bank will be cutting rates by 50 bps in March and, at the same time, more bad news from the US jobs front sent the euro to test 1.28 once more. Friday saw the much anticipated NFP and Unemployment rate both come in worse than expected. However, in a departure from the recent pattern, the markets surged, taking the euro up with them, as traders gambled that the massive jobless figure would spur Congress into passing President Obama’s stimulus package. EUR/USD rose to just shy of 1.30 before closing the week at 1.2924.

Sterling started the week off on the wrong foot and fell some 4 cents against the greenback on Monday as rating agency, Moody’s, cut the credit rating of Barclays bank. However, after testing support at 1.41 mid-Monday, cable spent the week on the up. There were some positive signs from UK data this week with PMIs across the sectors coming in better than expected and the Halifax house price survey finding that house prices rose an average of 1.9% in January. However, the news was not all positive. Downbeat releases included Wednesday’s consumer confidence, which found sentiment at record lows and Friday’s UK manufacturing production, which contracted for the tenth month in a row. On Thursday the Bank of England cut rates to an all-time low of 1.00%. The cut was widely anticipated and sterling climbed 100 pips against the dollar after the announcement. The pair closed the week a little above 1.48 at 1.4806.

The yen weakened significantly against the other majors as demand for the safe-haven currency fell and traders speculated that the passing of the US stimulus package was a done deal. Thursday saw US trading take the pair through key psychological resistance at 90.00 to close the week at 91.99

The big news this coming week will undoubtedly be the progress of Barack Obama’s financial rescue package. New US Treasury secretary Tim Geithner is scheduled to unveil full details of the revamped bail-out on Monday. However, the timing of the announcement has yet to be confirmed and The Wall Street Journal reported that it may be moved to Tuesday. The US Senate is expected to vote to slim down its version of the package on Monday and on Tuesday it will most probably pass it. Unfortunately, that won’t be the end of the story because lawmakers will have to reconcile the differences between the Senate’s and the House of Representative’s versions of the package. This could take a few days after which the Senate can vote to pass the final version and send it on to the President to sign or veto. Investor confidence could well spike at each successful stage of this process.

Other US news stories to note this week will be Fed Chairman Ben Bernanke testifying before the House Financial Services Committee and the Tim Geithner testifying on the TARP oversight before the Senate Banking Committee. US economic data releases of note this week include the trade balance on Wednesday; retail sales on Thursday and the University of Michigan’s consumer sentiment on Friday.

Things are pretty quiet data-wise in the euro-zone until Thursday brings the ECB’s monthly bulletin and industrial production numbers. Friday has GDP data for Germany, France, Italy and the euro-zone as a whole.

Tuesday is a busy day for UK data, with retail sales numbers, the house price balance and Britain’s trade balance. Wednesday includes the release of the latest jobless numbers and the Bank of England inflation report.

Friday sees the start of the G7 meeting in Rome where they are due to discuss a number of currency related issues as well as the provision of a global banking agency.

I see EUR/USD finding support at 1.2746 and resistance at 1.3330.
GBP/USD should find support at 1.43 and resistance at 1.53
I expect USD/JPY to encounter support at 90.70 and if this support holds, the pair should rise to test resistance at 94.60

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

3. Uncertain week ahead as Obama takes the helm.

Recessionary gloom gathers. The week was marked by mounting concerns for the integrity of the euro and saw another round of US government action to shore up its buckling banking sector.

EUR(hourly)

Euro sentiment took a dive on Monday with the announcement that Spain had joined Greece and Ireland on Standard & Poor’s negative credit-watch list. The global recession has hit the euro-zone’s fourth largest economy particularly badly and any down-grading will spell trouble for the European currency. EUR/USD traded lower throughout Monday and Tuesday to test support at 1.3150. The pair climbed to test 1.3335 early Wednesday only to plunge more than 200 pips over the next few hours as the news broke that the S&P was, in fact, cutting Greece’s credit rating from A to A-. Wednesday’s US retail sales numbers for December made grim reading indeed. As stocks on Wall Street tumbled, the dollar strengthened as traders ran for cover. On Thursday the ECB cut interest rates by the consensus 50bps to 2.00%. ECB president Jean-Claude Trichet prepared the ground for further cuts and suggested that these could well happen in March. The euro fell against the dollar after the ECB press conference to make the week’s low of 1.3025. The euro recovered from this low as the news broke that the US Treasury and The Fed were throwing a $138B lifeline to troubled giant, Bank of America. This news brought some relief to EUR, which closed the week at 1.3288.

GBP (hourly)

Sterling also kicked off the week heading south against the greenback. The data out of the UK has been pretty dire of late and Tuesday’s retail sales numbers were no exception, surveying the steepest decline since records began 14 years ago. Cable fell below 1.45 late Tuesday evening and then went on to range between 1.45 and 1.47 until the US government’s latest banking bail-out saw an upside breakout falter a tad above 1.49. The pound then took a dive as British banking giant Barclays saw its value shrink by 25% amid worries about the bank’s capital and outlook. Barclays were quick to deny that there were grounds for these concerns and the GBP closed a smidgeon below 1.4750. The British PM, the Chancellor of the Exchequer (UK finance minister) and the bank of England have spent this weekend putting together another emergency package to shore up the banking system and get credit moving through the economy. We will see what they have come up with early this week, no doubt.

Everything will be on hold in the US on Monday and Tuesday. There is talk that there will be a Obama rally on Wall Street and this would translate as pound and euro strength on the Forex market. Thursday is the most significant in terms of US data with housing numbers and the weekly new unemployment claims.

Things are busier in euro-land. Tuesday has the highly-regarded German ZEW data. Thursday sees the release of the ECB’s monthly bulletin, the stats the bank perused while making last week’s interest rate cut. We’ve also got the zone’s industrial new orders to look forward to on Thursday and on Friday there’s the regular raft of PMI data.

It is a pretty hefty week for the UK. There’s consumer prices on Tuesday and jobs data on Wednesday. Friday includes preliminary GDP and Retail Sales in the line-up.

We’re currently pretty bearish on the euro, although Obama euphoria may lift it to test 1.3450. However, if the news breaks that Spain’s credit rating has been down-graded or further cracks appear on the euro-façade, a clear break-down of 1.30 could see support being tested at 1.2330.

Cable is still ranging within 1.5350 and 1.4370. However, look for downside action.

USD/JPY will find support at 88.50 and resistance at 94.50