The End of a Volatile Week, Three Rate Decisions Ahead
Volatility returned to the markets last week as the bears took control and pushed the major U.S stock indices lower. The S&P 500 closed with a weekly loss of 1.84%, while the Nasdaq closed the week lower by -1.87%. Profit taking seemed to be the theme of the week, prior to the employment report released by the Bureau of Labor Statistics (BLS) on Friday. The equity market moves where rather ordinary and showed no irrational movement up until Thursday’s session. Economic data had a major impact on Thursday’s U.S stock session as Initial Jobless claims showed that 551k people had filed for unemployment benefits, exceeding market expectations. Furthermore ISM manufacturing added to the sell-off as showing a worse than expected figure. Even though the benchmark S&P 500 index received a major blow Thursday losing 2.6%, it was able to hold its 50 day moving average. To date it is poised to bounce after falling almost 6% since its high of 1080, earlier this month.
The major mover of the week was the US unemployment number which was released by the BLS on Friday. The US lost 263,000 jobs in September and the unemployment rate increased to 9.8%. Average expectations for this number were for losses of 175,000 jobs with Goldman Sachs at the high, near -250,000. Although the jobs number came in weaker that analysts had expected, one can see on the chart below that job losses are improving, since the low created in January of this year.
Forex Pairs on Major Support Levels
Consolidation was the major theme last week on the Forex market as participants took profits on their long positions ahead of the release of the employment result. The resilient Euro also felt the pressure dropping against the U.S Dollar. After touching a high on Monday of 1.4719, the EUR/USD slid down to $1.4526 on Tuesday. The beginning of the week was also characterized by light volume. Comments from the ECB’s Trichet that a strong dollar is “extremely important”, created heavy trading in the Euro which persisted for the balance of the week. The comments are not out of line with G7 policy and are not a step up the intervention ladder. The Euro derived little benefit from the weekend elections in Germany and retail sales unexpectedly dropped in August, denting optimism about the strength of the recovery in the region. Even though this pair has now come down to double support, continued pressure could push it back into the 6 big figure range, which the currency pair traded in from May to mid September.
On Monday the Yen took a shot at reaching weekly support seen at ¥87.05. The USD/JPY hit a low of ¥88.22, but softness in the US markets pushed the currency pair back above ¥89. The numbers out of Asia failed to help the Yen during the week; Japan’s Q3 Tankan report demonstrated that business sentiment is continuing to improve in the third quarter after hitting a record low in Q1. The figures also revealed worse than expected forecasts for capital spending cuts and likely to weigh on thoughts regarding the sustainability of the current recovery. On a positive note the unemployment rate fell to 5.5% in August down from 5.7% in July. The number exceeded market expectations, which were at 5.8%. Household spending also climbed by 2.6% in August, after dropping 2% in July. From a technical point of view the USD/JPY chart shows that the currency pair should attempt weekly support in the trading sessions to come if risk aversion continues to remain on the minds of market participants.
The Sterling also consolidated vs. the Dollar and the Yen this week after testing lows during Monday’s session. The GBP/USD briefly broke 1.58 touching 1.5769 after breaking important psychological support level of 1.60 at the end of last week. GBP/JPY broke through 140 hitting a low of ¥139.71 on Monday before bouncing back and consolidating around ¥143. The Sterling gained after GFK consumer confidence came in much stronger than forecast, pushing cable back up above $1.60. Credit problems that continue to persist somewhat eased this week but failed to help Sterling. The BoE credit conditions survey mentioned that low funding costs, an improved economic outlook and lower default rates are expected to see lending rise in Q4. Unfortunately the IMF disagreed with the BoE, warning that the UK is vulnerable to a credit shortage.
When taking a glance at the chart below one can see that last week’s trading session, ended mixed with the GBP/USD clinging on for support. Should support of $1.5853 break, this pair could be in stall for a nasty fall.
An Interest Rate Decision Week
Looking forward, market participants will have to keep an eye on interested rate decisions from the RBA on Wednesday, the BOE and ECB on Thursday. Even though no rate changes are expected, traders will scrutinize the comments that follow in order to receive a better clue of future monetary policy. Eyes will focus on the RBA rate decision as current economic data is showing that they are the closest to raising their rate. Even though a rate hike is unexpected this time round, hawkish words from officials could send the AUD/USD higher. Earlier during the week, there will be PMI service reports from the US, UK and the EMU on Monday. It will be interesting to see if the risk aversion continues, especially as the major currency pairs are now trading around critical support levels.
Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
