The market’s focus on euro zone events should not come as a surprise given the recent two year anniversary of the European debt crisis. Investors will be no less inclined after the decision by Greek Prime Minister George Papandreou to offer a referendum on the EU bailout package. However, today’s FOMC decision highlights one of the main themes of the foreign exchange markets over the past few years; USD weakness. While the FOMC statement may go materially unchanged the newly introduced FOMC press conference with Chairman Ben Bernanke may provide a bit more fireworks.
Economic News
USD – Ignore the FOMC Statement, Focus on the Press Conference
The USD continues to lose the FX beauty pageant of the least ugly currency. Despite a sovereign debt crisis that has spread throughout Europe the EUR/USD has been relatively buoyant while USD index continues to trade near its lows as of last week. The driver of this USD weakness has ultimately been the monetary policy of the Federal Reserve given the two previous programs of quantitative easing.
FOMC members have done a fine job of prepping the market for additional easing of US monetary policy. Beginning with a speech in Cleveland, Ohio in late September Ben Bernanke may have signaled his determination to introduce additional policy measures. This dovish stance has also been promoted by a number of FOMC members including Janet Yellen and William Dudley.
Given the mixed to better than expected economic data releases from Q3 (GDP, NFP, retail sales) and such close proximity to the introduction of Operation Twist, tomorrow’s FOMC statement/press conference may or may not contain references to QE3. Though given yesterday’s ISM Manufacturing PMI number that has fallen to 50.8 from 51.6, the foundation for an additional round of monetary policy easing is beginning to come to fruition and with it a USD negative. While an FOMC statement without changes to the specific wording is often met with yawns from the market, Bernanke’s press conference to follow may provide a bit more fireworks.
EUR – Democracy Reigns in Greece where it was Invented
In a surprise move Greek Prime Minister George Papandreou announced a public referendum on the most recent bailout plan for Greece and a vote of confidence in the Greek Parliament. This may be the only way to save his term as Prime Minister and his nation from self-destructing as the government pushes through harsh austerity measures. Contradicting reports suggest the public referendum could take place in the next few weeks or early next year with the vote of confidence likely within the next week. Market participants have already begun voting with their feet. This could be the end game for the EU as we may see just who will stay and who will go.
Since the start of the week the EUR/USD has fallen $0.05 and European bourses were sent lower by the tune of 5%. Support for the pair is the 61% retracement of the October move at 1.3565. The EUR/GBP is testing its rising trend line from June 2010 which comes in at 0.8560. A break here could have scope to 0.8525 from the September low.
AUD – RBA Cuts Rates and AUD Plunges
In the face of changes to the global macro environment the Reserve Bank of Australia decided to lower its interest rate 25 bp to 4.50%. RBA Governor Glenn Stevens said the central bank now maintains a “neutral stance.” It is interesting to note that outside influences are driving the monetary policy of Australia rather than domestic factors, though Australia has always been particularly dependent on Chinese economic growth to drive its own economy. Yesterday’s drop in China’s Purchasing Manager’s Index to 50.4 in October, dangerously close to the 50 boom/bust level does not bode well for the Australian economy nor the global economy for that matter.
At this time the AUD still represents one of the only developed market currencies with a relatively high interest rate. A reversal of market sentiment could be a catalyst for the AUD. The key level for the AUD/USD is 1.0230 where the 20-day moving average coincides with the 38% retracement of the October move. Below here rests support from 1.0120 from the October 18th low.
Crude Oil – Crude Oil Prices Face Economic Headwinds
Crude oil continues to trade in-line with improvements/declines in risk sentiment and the global economy. Yesterday’s release of Chinese PMI data that is so close to the 50 boom/bust level for the survey is one reminder of the headwinds crude oil prices face. With the major engine of global economic growth signaling a slowdown it will be difficult for crude oil to mount any significant rally.
Spot crude oil retraced 50% of its decline from May to October at $94.75 before pulling back. The congestion area from September at $90.30 is the initial support followed by $84 from the October 20th low.
Technical News
EUR/USD
An impressive run higher over the month of October took the EUR/USD as high as 1.4250, the 61% retracement from the May to October move. However, a failure of the pair to overcome this key technical mark does not bode well for the EUR in the near term. Also worth noting is the failure of the pair to move above its previously broken trend line from the June 2010 and the January 2011 lows. Falling stochastics on the daily and weekly chart also point to declines in the value EUR/USD. Support is located at 1.3915 from the October 17th high followed by 1.3650 off of the October 18th low and the October low at 1.3145. The 61% retracement level will serve as initial resistance with additional selling perhaps at 1.4450 from the trend line off of the May and July highs.
GBP/USD
Cable has failed to climb above both its 200-day moving average and stopped short of its 61% Fibonacci retracement target from the April to October move which at 1.6150 should serve as initial resistance. A move higher could go on to test the 1.6450 resistance off of the August high though daily stochastics have crossed and the weekly stochastics are beginning to roll lower as well. As such, a move lower could find support at 1.5890 from the October 26th low as well as the October 18th low of 1.5630.
USD/JPY
Another round of intervention has lifted the USD/JPY 400 pips for a 5.29% gain. However, the pair’s sharp move higher was unable to break a key falling trend line from the 2007 high which comes in this week at 79.70. With the long term downtrend still intact a move lower may once again test the all-time lows the pair will first encounter support at 77.85 from the September high as well as 77.50 from the mid-October high. Should the intervention continue the Japanese Ministry of Finance may find willing offers waiting at 80.20 which was the peak of the last round of intervention in August.
USD/CHF
The Swiss franc has once again resumed its downtrend versus the USD after moving as low as 0.8550, a level that has previously served as both support and resistance. A bounce from here could find an offer at 0.8900 from the resistance line off of the October peak. Should the downtrend from October extend into November a break of 0.8550 may have scope to 0.8240 from the August high.
The Wild Card
S&P 500
US equities have pulled from their month long appreciation in October. With the first two trading days of the week the S&P 500 has retraced almost 38% of the October move. Forex traders should note the key support levels of 1,185 from the October 18th low and the 61% retracement of the October move at 1,152. Resistance is last week’s high of 1,288 followed by the falling resistance line off of the May and July highs.
Forex Market Analysis provided by ForexYard.
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