Euro bulls interrupted just as 1.40 was becoming more palpable..

Last week the EUR/USD’s seemingly-unstoppable six-week advance was interrupted by what the markets have dubbed as the Yellen effect. After its six-week rally, that gave the euro over 3% of gains when seen against the US dollar, last week we saw the currency pair give back -0.86%, edging lower from recent 1.3966 highs just short of the psychological 1.40 levels. The euro bulls were interrupted just as the currency pair was marking fresh 2 ½ year highs, and at a time when 1.40 was becoming increasingly more palpable.

Latest FOMC outcome, the Yellen effct

What was this Yellen effect? Last week Fed’s new chair Janet Yellen came out with a bang, as she addressed her first post-FOMC meeting and announced the Fed’s latest policy decision. In essence the announcements regarding Fed policy were not unexpected, but nevertheless investors chose to react quite strongly to the Fed’s communication.

From the Fed’s last policy announcement we saw that the pace of the Fed’s tapering continued as expected; the Fed announced another $10 billion reduction in its monthly Asset Purchases and is expected to be terminated by year end. The most important changes that emerged from the last policy announcement were:

  • Stopped linking rate hikes to 6.5% unemployment rate (adopted since December ’12).
  • Defined the “considerable time” between the end of the bond purchases and the first rate hike as six months (still however in line with the October’12 policy statement that warranted exceptionally low levels for the Federal Funds rate at least until Mid-2015).

The longer term EUR/USD forecasts point towards the currency pair hitting 1.31 by end of 2014 and to breach 1.30 levels as we approach Mid-2015 (when the first rate hikes are expected). Yet in the immediate term what we have seen till now is a surprisingly resistant euro – at the time of writing the EUR/USD is trading at 1.3808.

The "Sickman" of Europe registers a notable improvement

Early into the current week the euro reacted positively to stronger than expected French PMI data, showing that in March the Manufacturing and Services sector made it into growth territory, surpassing the 50 level. However the euphoria was short lived and eased by the time Germany and the EZ (as a whole) reported numbers that were softer compared to the previous, but nevertheless still at a safe level above the 50 that delineates growth from contraction.

These figures raise optimism because they suggest that the EZ economy continues in its recovery, but also because of the convergence between the EZ’s largest two economies; Germany and France. Monday’s figures saw the PMIs come closer as France picked up speed, while Germany eased slightly in a sign of convergence.

**For the current week we are expecting EUR/USD downside to remain supported ahead of 1.3713 and after the move lower to target 1.3911 levels

Support: 1.3713/1.3632 Resistance: 1.3911/1.4028

Aussie strength baffles as Chinese data eases

It was not only the euro’s resilience that left investors baffled, the Aussie was also a noteworthy rival amongst the major currencies. The Aussie surprised given the recent weaker data out of China (early into Monday morning China’s HSBC PMI number continued to ease lower). The AUD usually tends to be affected by its close ties with Chinese trade.

The Aussie continues to garner further gains marking fresh 3-month highs against the USD at 0.9157. The AUD is up +1.54% in these last 3 months, according to the Bloomberg Correlation-Weighted Currency Index (BCWI).

This defiance of gravity, by the Aussie, may be because the softer Chinese data is actually feeding expectations of soon-to-be fresh stimulus for the Chinese economy.

**The current uptrend for the AUD/USD should find resistance at 0.9157-0.9215, a correction should then materialise with a target of 0.9005

Support: 0.9005/0.8929 Resistance: 0.9148/0.9215

UK inflation eases further

UK Y/Y inflation eased to 1.7% from a previous 1.9% for the month of February, easing to 4 ½ year lows and slowing further from the BoE’s 2% target. The British pound retains the title of the largest gainer amongst the major currencies for these past twelve months, according to the BCWI it is up +9.76% at the time of writing. It seems that traders have already priced in most of the expectations for rate increases by the British Central Bank.

GBP/USD has eased to lows of 1.6465 for the current week, and up to the time of writing. Despite the short term technical correction we have seen in these past three weeks, overall the trend has been bullish since July’13 and we’ve seen the currency pair peak to 1.6822 (highs last seen in November ’09) in February this year.

The GBP has seen support even against the single currency; it has reached one-year highs when EUR/GBP hit 0.8157 last February. Since then the price has seen some correction and we are currently trading at 0.8350.

**GBP/USD downside this week should remain capped at 1.6352. The pair will most likely target 1.6628 if we have a daily close above 1.6550 levels

Support: 1.6419/1.6352 Resistance: 1.6610/1.6733

Technical Key points: EUR/USD is bullish, target 1.4000, key reversal point 1.3700. EUR/GBP is neutral. USD/JPY is neutral. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is bearish, target 0.8575, key reversal point 0.9000. AUD/USD is neutral. NZD/USD is bullish, target 0.8675, key reversal point 0.8400.

This article has been prepared by Rudolf Muscat, Senior Trader at RTFX Ltd.