Last week was an important week for currency markets. We saw the FOMC minutes signalling Fed dovishness, Mario Draghi highlighted the ECB’s intention to boost inflation as data out of Europe highlighted a worsening economic situation, and expectations of a BoE rate hike were pushed out further in light of Fed dovishness. The BoJ is expected to continue with it’s quantitative easing programme this month as BoJ’s Kuroda noted that the country is only halfway to achieving it’s 2% inflation target. Against this backdrop, data releases over the coming week will be key for short term direction.
EURUSD – Data continues to come in weaker from Europe and was highlighted by the fact that German factory orders fell at their fastest rate since 2009. Inflation has hit a cycle low and the ECB has acted via measures that should expand their balance sheet, signalling further downside for the pair. With bond yields continuing to fall, they are becoming less and less attractive for foreign investors, which would reduce flows into the EUR.
Technically, whilst price remains above the NFP low, consolidation in intact and the key objective for bulls will be a close above 1.2820 to suggest the Euro has scope for a larger corrective phase bounce initially targeting 1.2995. With Daily Order Book Regression having crossed back to the downside I will be watching for a break of the NFP low in line with a confluent crossover on the Psychology Indicator to switch to a short view in line with fundamental flows.
USDJPY has pulled back from 110 high to print a 107 handle. Yen is also sufferineg from pressure from renewed weakness in the high yielders (AUD and NZD) and the low yielders (EUR and CHF) against the JPY. The key catalyst to bring a halt this corrective phase will be if the BOJ if ease this month the, however the key question will be how much of that is priced in to the market.
Technically, having broken down through consolidation at highs, the correction to the mid 105 breakout area looks intact. On Balance Volume is moving downward and Daily Order Book Regression & Psychology Indicators are both firmly to the downside. Whilst this is the case, short view remains intact.
GBPUSD – Markets remain uncertain of the next move by the BOE and probability of the first rate hike in the UK has been moved out by a few months over the past two weeks, especially with the FOMC minutes proving to be more dovish than the market expected, this will have implications for the BOE, as they are unlikely to hike rates much too far in advance of key trading partners. Cable could suffer further losses if key releases on inflation and employment print weaker than consensus.
I will be looking for a cross to the downside on the Daily Psychology Indicator, confirming the move made by Order Book Regression to trade further downside through the NFP lows.