FXTM’s Weekly Review – An unexpected move from the Bank of Japan

EURUSD – A return to the downside

The Eurodollar declined by over 200 pips last week and has already commenced the first week of November by falling to 1.2439, its lowest value since the 22^nd September 2012.

There were two main contributors behind last week’s bearish movement, with the US Federal Reserve concluding QE as planned and more disappointing German economic data leading to the EU sentiment further weakening. The latest German IFO data was recorded at a 22-month low and was followed by comments from the IFO that no growth is expected in Q4. To make matters worse, German inflation unexpectedly slowed down in October, highlighting that the slowdown in German economic performances is having a detrimental impact. The week concluded with German Retail Sales declining by 3.2% in September.

This week, the two major events for traders to look out for will be the European Central Bank (ECB) interest rate decision on Thursday and the US Non-Farm Payroll announcement on Friday. Before then, we have more EU PMI data to be released throughout the week and, although the Eurodollar has returned to its early October weakness, investors should not discount the possibility of the PMI releases providing the EU economic sentiment with an unexpected boost. We did see the EU PMIs come in higher than expected a fortnight ago, and a continuation of this pattern would calm down fears over stagnant economic growth.

USDJPY – On its way to 113

Last week it was mentioned that the USDJPY was either overextended or consolidating before its next upside rally – it turned out to be the latter. A combination between the US Federal Reserve concluding QE on Wednesday and the Bank of Japan (BoJ) surprising the markets by unexpectedly increasing stimulus on Friday morning led to this pair extending by 300 pips on Friday alone. The pair has this morning begun the European session at its highest value since December 2007 (112.975) and looks to be on its way to entering 113.

The majority of upcoming USDJPY movement will be reflective of how the markets react to the US data. The JPY is looking weak after the surprise announcement on Friday from the BoJ to increase stimulus and Governor Kuroda is expected to explain this decision during a speech on Wednesday morning. Although the JPY indeed looks weak, investors should still pay attention to US Factory Orders (Tuesday) ISM-Non Manufacturing Composite (Wednesday) and of course, the US Non-Farm Payroll (Friday). If US economic data disappoints and points towards a consensus that the Federal Reserve will not raise interest rates anytime soon, Dollar profit-taking remains very possible.

From a technical standpoint on the Daily timeframe, the unexpected move from the BoJ allowed the USDJPY to finally surpass the 110.270 psychological resistance level. Many analysts see the potential for the USDJPY to conclude the year around 114, but US economic data needs to remain consistent in order for this to be achieved. Possible resistance before a potential move to 114 can be found at 113.310 and 113.810.

At the same time, both the Stochastic Oscillator and RSI are each located inside the overbought boundaries. As mentioned already, if US economic momentum slows down at all and encourages speculation the Federal Reserve will delay providing a timeframe for a rate increase, investors will become very tempted to close their positions on the Dollar. In the event this occurs, USDJPY support can be found at 112.240 and 111.540.

Gold – A key break below $1180 

A combination of the US Federal Reserve concluding QE and the US GDP being announced much higher than expected at 3.5% improved the US economic outlook last week. This in turn led to Gold finally extending below $1180, a move that shouldn’t be underestimated. Previously the $1180 area had acted as a critical support level for Gold and on the past three occasions the commodity reached $1180, Gold reversed. This time, there was no reversal. This should be seen as a crucial signal that perhaps the hedge funds were onto something when they highlighted as far back as in 2013 that 2014 would be the year Gold began a correction.

The upcoming week is heavy on US economic data, meaning volatility in the Gold markets may not be over quite yet. Another strong employment report at the end of the week would improve US economic optimism, and likely lead to increased pressure on the Federal Reserve to begin discussing a potential timeframe to raise rates.

In reference to my technical observations for Gold on the Daily timeframe, both the Stochastic Oscillator and RSI appear to now be approaching the oversold boundaries. However, the downside break below $1180 is a critical sign that the bears may now be in control of Gold’s direction. Further indications of the US economic outlook improving would encourage bearish moves to $1156 and $1146. At the same time if US economic data disappoints this week, the previously critical $1180 support level will now become resistance.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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NOTES TO EDITORS

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