Weekly Outlook: 2015, January 04 - 11

Forex Weekly Outlook January 5-9

US ISM non-manufacturing PMI, trade balance, FOMC meeting minutes, Major employment data including the all-important Non-Farm Payrolls report, Rate decision in the UK. These are the main economic releases for this week. Let’s see, in detail, the market movers to impact Forex trading.

Last week, US jobless claims release disappointed with a 17,000 rise in the number of new claims, reaching 298,000. However, the four week moving average inched slightly to 290,750. Furthermore, Consumer confidence, released earlier, rebounded to 92.6 following 91 points in November, indicating consumers are more confident at year-end than they were at the beginning of the year. The present situation index reached its highest level since February 2008. Economists expected sentiment to reach a higher reading of 94.6. Will the US economy continue its positive trend in 2015?

1. US ISM Non-Manufacturing PMI: Tuesday. 15:00. Non-manufacturing Purchasing Managers Index rebounded in November after two straight months of declines. The Index increased to 59.3 beating forecasts of 57.5. 14 industries out of the 18 surveyed reported expansion. Non-manufacturing PMI is expected to reach 58.2 in December.
2. US ADP Non-Farm Employment Change: Wednesday, 13:15. U.S. private sector added 208,000 workers in November following 230,000 jobs gain in the previous month, indicating the slowdown in global economy does not impact US domestic activity. The ongoing improvement in the labor market leads to faster wage growth. A Labor Department report showed compensation per hour increased 1.3% in the third quarter rather than the 2.3% reported in the previous month, and declined 0.9% instead of the expected 2.3% rise. ADP job gain is expected to reach 227,000 in December.
3. US Trade Balance: Wednesday, 13:30. The U.S. trade deficit contracted less than expected in October reaching $43.03 billion. Lower crude oil prices had limited impact. Imports jumped 0.9%, reaching $241 billion, while exports increased 1.2% to $197.5 billion, indicating the economy was is resistant to the slowdown in global demand. Economists forecasted a deficit of $41.3 billion. Exports to the European Union increased 8.5 percent, while China saw a 36 percent jump in the value of goods it imported from the United States. Exports to Japan rose 4.0 percent, while those to Canada and Mexico – the main U.S. trading partners – reached record highs. Sustained dollar strength, however, is expected to undercut export growth in the months ahead. Imports from China hit an all-time high, leaving the politically sensitive trade gap at $32.6 billion. U.S. trade deficit is predicted to narrow to 42.3.
4. US FOMC Meeting Minutes: Wednesday, 19:00. The Federal Reserve minutes from November showed some members were concerned about the moderate pace of inflation, despite the strengthening trend in the job market. Policy makers projected a weaker economic outlook and increased downside risks in Europe, China, and Japan.
5. UK rate decision: Thursday, 12:00. The Bank of England kept its key interest rate at a record low of 0.50% amid weak inflation threatening economic growth. Policy makers also voted to maintain cash stimulus at £375 billion. Britain’s 12-month Consumer Price Index (CPI) rate increased to 1.3% in October from a five-year low of 1.2 percent in September, but remained far below the BoE’s government goal of 2.0%. No change in rates is expected this time.
6. US Unemployment Claims: Thursday, 13:30. The number of Americans filings initial claims for unemployment benefits in the U.S. increased last week by 17,000 to a seasonally adjusted 298,000, beating market forecast. This was the highest figure since November 22 topping analysts’ predictions for a 287,000 reading. The four-week moving average, a less volatile measure, climbed to 290,750. The number of claims is expected to reach 291,000 this week.
7. Canadian employment data: Friday, 13:30. Canada’s job market had a temporary setback in November, contracting 10,700 jobs which nudged the unemployment rate slightly to 6.6%. However, despite the disappointing release, the general trend is positive showing a 146,000 job increase in the last 12 months. The majority of job addition in the last few months are in full time employment. Canadian economy is expected to expand in 2015 particularly if the US economy continues to strengthen. Canada’s job market is expected to add 10,300 positions while the unemployment rate is expected to remain at 6.6%.
8. US Non-Farm Employment Change and Unemployment Rate: Friday, 13:30. The US labor expected more than expected in November, surging by 321,000 jobs after adding 243,000 on October. This was the biggest jump in employment since January 2012, reaching a12 month average of 224,000. Economists expected a gain of 231,000 positions, however wage growth was still rather weak. The unemployment rate for November was 5.8%, unchanged from October’s reading in line with market forecast. The report also said that the labor force participation rate was unchanged at 62.8%. Us labor market is forecasted to expand by 241,000 while the unemployment rate is expected to decline to 5.7%.

The AUD/USD starts out 2015 in a position to decline further after a weak close in December. Last month, the Forex pair reaffirmed its downtrend on the monthly chart with its sustained move under the previous main bottom at .8659 and the major 50% level at .8545. Both of these prices are resistance in January. Additional resistance angles come in at .8544 and .8556. The best area to sell on a retracement is the resistance cluster at .8544 and .8545.

The main range was formed by the July 2008 bottom at .6008 and the July 2011 top at 1.1080. Its retracement zone at .8545 to .7945 is currently being tested. Last month’s sharp decline through the upper or 50% level at .8545 means the selling pressure is real which makes the Fibonacci level at .7945 the primary downside target in January. Trader reaction to this price will set the tone for the month.

If the selling pressure is strong enough to take out .7945 with conviction then look for the break to extend into the next uptrending Gann angle at .7508.

Oversold conditions could produce periodic short-covering rallies, but these rallies are likely to set up fresh shorting opportunities. Bearish traders should continue to press the market unless .8544 is taken out and this seems pretty remote given the fundamentals.

Fundamentally, the combination of a weak Australian economy and the impending Fed interest rate hike sometime between April and June should be the forces driving the AUD/USD lower in 2015. Low iron ore prices and a weakening economy in China are two forces weighing on the Australian economy. The interest rate differential is favoring the U.S. at this time. This should be the key fundamental factor to focus on this year.

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The new year begins with the interest rate differential strongly favoring the U.S. Dollar over the Euro. Simply stated, the U.S. Federal Reserve is getting ready to raise interest rates in 2015 while the European Central Bank is gearing up for a fresh round of quantitative easing (QE). Rates should rise in the U.S. and should fall in Europe, increasing demand for the Greenback.

The key factor that will determine the ECB’s decision on quantitative easing will be inflation. The central bank is trying desperately to prevent deflation from creeping into the economy. Inflationary spikes can be tolerated because the central banks have aggressive tools to fight this. However, deflation is a difficult challenge because central bank weapons are limited.

The ECB will start to get important inflationary data early in the month which should cause a volatile reaction from traders in either direction. The first key date to watch is January 7. On this date, traders will get the opportunity to react to the latest CPI Flash Estimate and Core CPI Flash Estimate. These reports should determine what the ECB will do about QE at its monetary policy meeting on January 22.

Oversold conditions could produce periodic short-covering rallies throughout the month, but these rallies are likely to set up fresh shorting opportunities. The monthly chart indicates that the fundamentals are bearish and even if they did begin to change, it would take several months to clear out the shorts and form a bottom.

The key number to watch early in the month is the July 2012 bottom at 1.2042. This is the first major downside target so traders may try to take care of this price early in the month. If the selling pressure persists then look for the downside momentum to continue down to the June 2010 bottom at 1.1876.

The 1.2042 price level may be treated like a pivot throughout the month. A sustained move above it may even trigger a rally back to 1.2341, but this is unlikely to occur unless the ECB backs away from implementing QE this month.

The initial reaction to QE should be bearish for the Euro. The size of the break will be determined by the size and length of the program. Some optimistic investors feel the EUR/USD will decline during the first quarter of 2015, but will strengthen throughout the year because the QE will start to help stimulate the Euro Zone economy. Others feel that the U.S. faces too much exposure to China and this could derail its economy.

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The GBP/USD opens up the new year in a weak position. 2015 begins with the interest rate differential in favor of the U.S. Dollar. This is 180 degrees from last December when investors were making powerful bets that the Bank of England would raise interest rates before the U.S. Federal Reserves.

The British Pound topped in July 2014 when it started to become clear to traders that the BoE didn’t have the all clear signal from the economy to begin hiking rates. Like many of the major economies, the U.K. is battling to keep inflation above its benchmark 2 percent level. This is the story that will concern investors throughout the new year.

Since the U.S. Fed appears to be on a path toward an interest rate hike sometime between April and June, the first quarter and perhaps the second quarter will have to be conceded to the U.S. Dollar. This means the GBP/USD will continue to trade sideways to lower at least during the first half of the year.

The year ended with the Forex pair trading on the bearish side of a major retracement zone at 1.5720 to 1.6001. This levels are key resistance in January.

December’s close at 1.5580 has created some interesting set ups for the month. The first thing traders should note is that the close is on the strong side of the angle that guided the market lower for 5 months. This angle is at 1.5270. Crossing to the bearish side of this angle will put the market in a weak position.

The nearest angle to watch is an uptrending angle at 1.5532. This angle held as support last month so buyers do recognize it. Holding this angle could lead to an early short-covering rally and a slight upside bias.

The tone of the market will be determined by trader reaction to 1.5532. Holding this angle could create enough upside momentum to trigger a short-covering rally into 1.5720.

A failure to hold 1.5532 will mean that sellers have a firm grip on the market and are likely to try to press it into at least 1.5270 in January.

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The new year starts with the U.S. Federal Reserve on a path toward raising interest rates sometime between April and June. The Bank of Japan is committed to keeping interest rates low in order to weaken the Yen and attract fresh export business. On paper, there doesn’t appear to be anything in the works that could derail the USD/JPY rally.

The strength of the U.S. Dollar over the Japanese Yen should continue throughout 2015 simply because the interest rate differential favors the Greenback. Overbought conditions could trigger profit-taking breaks, but for the most part, the pressure should be to the upside.

Any surprises with the U.S. economy that could encourage the Fed to back away from or delay an interest rate hike could also lead to weakness. However, this is likely to show up in the U.S. economic reports especially the labor market statistics and inflation data. As long as the U.S. continues to add jobs each month, the Fed should remain on a path toward an interest rate like by mid-year or even sooner.

A stock market sell-off could also encourage Japanese investors to repatriate their money. This may also cause a minor glitch in the solid uptrend, but at this time, the trend doesn’t appear to be in any danger of changing. In addition, if the market gets “too” bullish or gets hit with periods of excessive volatility, the BoJ may intervene to calm things down, but the chances of this occurring are pretty remote at this time.

Technically, the USD/JPY closed the year in an uptrend and straddling a major Fibonacci level at 120.11. Overtaking this level with conviction and sustaining the move could lead to a test of the June 2007 top at 124.13 this month.

A failure to overtake 120.11 will indicate investor indecision which could trigger a break back to the nearest uptrending support angle at 116.82.

The tone of the market this month will be determined by trader reaction to 120.11. The tone of the market for 2015 will be determined by investor reaction to 119.825. Keep this price on your charts all year.

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Gold markets did very little during the course of the week, essentially bouncing around just below the $1200 handle. Because of this, it appears of the market is ready to go sideways in the near term, although there is still a bit more of a negative bias at the moment. If we managed to get above the $1250 level, at that point time we would be comfortable with longer-term buying opportunities. Ultimately though, we feel that this market really doesn’t have a lot of momentum one way or the other, so therefore we are on the sidelines as far as long-term trades are concerned.



the source

The USD/JPY pair initially fell during the course of the week but found enough support below the 120 level to turn things back around and form a nice-looking hammer. The hammer of course is a positive sign, and as a result we feel that this market will continue the uptrend that we have seen for some time now. On top of that, the US Dollar Index of course went higher as well, so it does suggest that overall the US dollar will continue to be the favored currency in the Forex markets. With that, we are buyers of dips in this particular currency pair.

Ultimately, we believe that the US dollar will continue to be bought in favor of the Japanese yen, as the Bank of Japan continues to work against the value of its own currency by stepping into the bond markets and purchasing Japanese Government Bonds, essentially quantitative easing such as the Federal Reserve has done.

Look at the shape of the candle, it suggests that the markets review the 120 level as a bit of a “line in the sand”, but we believe that there is even more support down at the 115 handle than they are, so really at this point time this is a market that looks like it should continue to have buyers step into it again and again.

Keep in mind that the Federal Reserve has stepped away from the bond markets, essentially ending the quantitative easing game. With that, the US dollar will continue to strengthen overall, and with the Bank of Japan doing the exact opposite it makes quite a bit of sense that this market would continue to go higher given enough time and as a result every time it dips I will that the buyers will step in as it makes sense to think of the US dollar as being “on sale” against the Japanese yen every time we fall. In fact, at this point in time we have no scenario in which we are willing to sell this market.



the source

The USD/CAD pair fell initially during the week, but then shot higher in order to break out. We closed towards the top of the range, and it now appears that we are heading to the 1.18 handle in very short order. Pullbacks at this point time offer buying opportunities just as they always have, as the US dollar is without a doubt the favored currency around the world. We believe that there is essentially a “floor” in this market at the 1.12 level. We have no interest in selling at the moment.



the source

The NZD/USD pair initially tried to rally during the course of the week, but you can see that the area above the 0.78 level offered way too much in the way of resistance. With that, it appears of the market is ready to go lower, so we are sellers overall. However, we would have to break down below the 0.76 handle in order to find enough downward pressure in order to drop to the 0.75 handle, and then of course the 0.70 handle as the Royal Bank of New Zealand continues to jawbone the value of the Kiwi dollar down.



the source

The GBP/USD pair broke down below the 1.55 level at the end of the week, essentially “opening the floodgates” to the 1.50 handle. With that, we have plenty of reasons to sell this market and absolutely no interest in buying it. At this point in time, the 1.55 level now looks as if it’s resistance, mainly because it was previously support. The market looks as if it’s ready to continue to grind lower because of that, so we are simply waiting for resistant candle in order to push the value of the British pound down.



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