Weekly Outlook: 2015, February 01 - 08

Technical Analysis for Crosses

GBP/JPY

The pair is still stuck between confirmation levels represented in the support 176.25 and resistance 178.85, as we wait to breach one of them to clearly determine the next move, whereas breaking this support pushes the pair for further bearish correction targeting next 173.10, while breaching the resistance pushes the pair back to the main upside move, and the first target is 181.40. Therefore, we will keep monitoring the pair at the referred to important levels.
Support: 177.50, 176.85, 176.25, 175.70, 175.05
Resistance: 177.85, 178.85, 179.90, 180.80, 181.40
Recommendation Positive expectations above 178.85, risk-limit below 177.50. Negative below 176.25, risk-limit above 177.50

EUR/JPY

The pair tested 134.15 levels with the beginning of today's session but without breaching it, so we remain nuetral waiting to confirm the next move by breaching the mentioned resistance of breaking the support 132.40, whereas breaching this resistance reactivates the positive expectations suggested in our latest reports, targeting 137.80 mainly, while breaking the support pushes the pair towards 130.35.
Support: 133.20, 132.40, 131.65, 131.10, 130.35
Resistance: 134.15, 135.05, 135.05, 136.45, 137.60
Recommendation Positive expectations above 134.15, risk-limit below 132.40. Negative below 132.40, risk-limit above 134.15.

EUR/GBP

The pair moved to the upside and breached 0.7500. Trading again below the referred to level is required to confirm the previously suggested negative expectations, whereas stabilizing below this level is negative and support the downside move targeting 0.7370 and 0.7300, while breaching 0.7565 threatens to fail the expectations.
Support: 0.7500, 0.7450, 0.7400, 0.7370, 0.7300
Resistance: 0.7520, 0.7600, 0.7660, 0.7685, 0.7700
Recommendation Negative expectations below 0.7500, risk-limit above 0.7600.

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US ISM Manufacturing PMI, Rate decision in Australian and the UK, US Trade Balance and important employment data including the big NFP event. These are forex market movers for this week. Check out these events on our weekly outlook

Last week US jobless claims plunged 43,000 to a 15 year low indicating the labor market strides in the right direction. Economists expected claims to tick down to 301,000. Earlier that week, the Fed held its monthly monetary policy meeting, repeated the “patience” wording regarding a possible rate hike. However the policy makers were more concerned about international developments and their possible effect on US future growth. The Fed also stated that the labor market has improved further and household spending rose moderately, boosted by low energy prices. Will the US economy continue to improve?

1. US ISM Manufacturing PMI: Monday, 15:00. Manufacturing PMI declined in December, coming in at 55.5 following 58.7 in the previous month. Economists forecasted a higher reading of 57.6. Manufacturing output is constantly expanding; however, the rate of growth has eased in the fourth quarter. Companies express growing uncertainty about the outlook in 2015, especially regarding exports. Regarding the fall in oil prices, some ISM members think it would have a good impact on the manufacturing sector while others disagree. Manufacturing PMI is expected to reach 54.9 this time.
2. Australian rate decision: Tuesday, 3:30. Australia’s central bank has kept its interest rate at a record low for 17 months amid the economic transition from mining investment. Many economists believe a rate cut is in order since the economic growth has not picked up to offset the sharp decline in mining investment. Low interest rates may boost investments in the non-mining sectors. In addition. Falling commodity prices like iron and oil will weaken export revenues. No change in rate is expected now.
3. NZ employment data: Tuesday, 21:45. New Zealand’s Unemployment rate was better than expected in the third quarter, falling to 5.4% from 5.6 in the prior quarter. Employment expanded 0.8%, higher than the 0.5% gain reached in the second quarter and better than the 0.6% rise forecasted by analysts. However, on a yearly base, employment expanded 3.2%, below the 3.7% seen in the previous quarter. New Zealand’s employment market is predicted to grow by 0.8, while the unemployment rate is expected to drop to 5.3%.
4. US ADP Non-Farm Employment Change: Wednesday, 13:15. U.S. private sector employment gained 241,000 jobs in December, beating forecasts of a 227,000 job addition. The increase was broad based and was not affected by oil-related companies that experienced a dramatic fall in crude prices, suggesting the US labor market is resilient and does not depend on any one industry. U.S. private employment is expected to gain 221,000 this time.
5. US ISM Non-Manufacturing PMI: Wednesday, 15:00. Service sector activity expanded at the slowest pace in six months, reaching 56.2 in December, after posting 59.3 in November. Economists expected a reading of 58.2. New Orders Index was 2.5 points lower than 61.4 registered in November. Employment Index declined 0.7 points, reaching 56.0 and Prices Index plunged 4.9 points to 49.5. Service sector is forecasted to grow to 56.6.
6. UK rate decision: Thursday, 12:00. The Bank of England policymakers voted unanimously to leave rates at s record-low in January amid tumbling inflation. Both Martin Weale and Ian McCafferty, formerly opposing such a move, had a change of heart as falling oil prices threatened to weaken further the already subdued inflation. The ongoing improvement in the unemployment rate and wage growth didn’t persuade MPC members to vote for a change in policy. Following this statement, economists pushed back their forecast for a rate hike to early 2016.
7. US Trade Balance: Thursday, 13:30. The U.S. trade deficit contracted in November to an 11-month low reaching $39 billion, the smallest since December 2013. Falling crude oil prices helped to strengthen domestic demand, but exports fell 1.0% to $196.4 billion in November, suggesting the slowing global economy may start to affect the US market. Economists expected deficit to reach $42.3 billion. U.S. trade deficit is expected to contact further to$38 billion.
8. US Unemployment Claims: Thursday, 13:30. The number of Americans filing initial claims for unemployment dropped sharply to a 15 year low, indicating the US labor market continues to strengthen. However, the unbelievably low figure can be also attributed to a holiday-shortened week. The 43,000decline was much better than the 301,000 addition forecasted by analysts. The four-week moving average, fell 8,250 last week to 298,500. The number of claims is expected to reach 277,000 this time.
9. Canadian employment data: Friday, 13:30. Canada’s labor market had another mild setback in December, shedding 4,300 positions after contracting 10,700 jobs in November. The unemployment rate remained unchanged at 6.6%. Full-time employment in December grew by 53,500 jobs, while part-time work dropped by 57,700 indicating the overall picture is quite positive. The 12-month gain was 185,700 positions, an increase of 1.0% , while the six-month moving average for employment growth was 22,100 jobs, up from 21,300 in November.Canada’s labor market is expected to increase by 5,100 jobs, while the unemployment rate is expected to reach 6.7%.
10. US Non-Farm Employment Change and Unemployment rate: Friday, 13:30. U.S. job growth edged up in December, rising 252,000 after a revised jump of 353,000 in November. Meanwhile, the jobless rate declined to a 6.5 year low of 5.6%. However, despite the positive figures, wages did not increase in December a worrisome sign which may compel the Fed to leave rates unchanged for an extended period. Us job market is expected to add 231,000 positions. The unemplolyment rate is forecsted to remain unchanged.

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Fundamental Forecast for Dollar: Neutral

• The US Dollar has advanced for seven consecutive months through January – a record back to the Gold Standard
• NFPs and the PCE inflation indicator will further stir hawkish Fed expectations, but the theme may be mature

Top event risk is the week-ended January NFPs. The net change in payrolls isn’t nearly as important as the ‘qualitative’ figures. The jobless rate has already touched past year milestones for rate hikes – a few years ago, then Chairman Ben Bernanke tied a first rate hike to an unemployment rate of under 6.5 percent. It is currently 5.6 percent. Perhaps the inflation aspect of the labor data is the lynchpin. Wage growth has struggled to catch traction. A particularly weak showing here, on the other hand, could reinforce the more distant timeline the market has on hikes and instead lead to a downgrade in FOMC forecasts at the March meeting.

Monetary policy is the engaged fundamental driver at the moment, but it is important for Forex traders not to take their eyes off of systemic investor sentiment. In the ‘risk on’ position, progress is slow and struggles to draw in the entire market. However, should full scale ‘risk aversion’ strike, conviction will span the financial system. As momentum picks up, the Dollar will see its haven appeal swell. Yet, in the early stages of such a dynamic shift, the same yield curve appeal the currency cultivated these past months could lead to capital outflow. Should sentiment turn, the Greenback’s bearing will depend on how hot the fire is.


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Fundamental Forecast for Japanese Yen: Neutral

• Disappointing US economic data enough to keep pressure on USDJPY
• One-sided positioning warns of a potential JPY breakout

A highly-anticipated US Nonfarm Payrolls data print could ultimately provide the spark necessary for a larger Dollar break versus the Japanese Yen, and current signs favor the downside on the USDJPY and broader JPY pairs. Indeed we recently highlighted heavily one-sided retail FX trader positioning as a key reason the Dollar could break lower against key counterparts. A sharp drop in US interest rates and Treasury Yields may likewise keep downside pressure on the yield-sensitive USDJPY absent a material reversal of trends. Thus all eyes turn to the highly-market-moving NFPs print as it could potentially set the stage for a larger USD correction.

There is comparatively little foreseeable economic event risk out of Japan and as such eyes will remain on the US economy and broader market sentiment. The correlation between the USDJPY and the Nikkei 225 index has weakened notably as of late; recent gains in Japanese equities have not been enough to lift the exchange rate. Yet a further rise in equity market volatility would likely restore said link, and we’ll keep a close eye on global equity markets as the US S&P 500 registers its second-consecutive monthly decline. Continued losses could be enough to send the USDJPY through key support.


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Fundamental Forecast for GBP: Neutral

• Pound May Rise as 4Q UK GDP Data Boosts BOE Rate Hike Bets
• GBPAUD Weekly Opening Range Setup- Long Scalps at Risk Sub-1.92

The Bank of England (BoE) interest rate decision may have a limited impact on GBP/USD as the central bank is widely expected to preserve its current policy at the February 5 meeting.

According to a Bloomberg News survey, all of the 41 economists polled anticipate the Monetary Policy Committee (MPC) to retain a wait-and-see approach, and the central bank may once again refrain from releasing a policy statement as it remains in no rush to normalize monetary policy. Even though BoE Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, the committee may further delay its normalization cycle especially as price growth undershoots the 2% target.

With that said, the BoE may curb its economic assessment while delivering the quarterly Inflation report on February 12, but we may see a growing number of MPC officials show a greater willingness to raise the benchmark interest rate over the medium-term as the central bank anticipates a stronger recovery to take hold in 2015. In turn, the ongoing improvement in the labor market may continue to encourage expectations for faster wage growth, and the central bank may sound more upbeat this time around as it sees weaker energy prices as a net positive for the U.K. economy.

Nevertheless, GBP/USD may continue to carve a string of lower-highs in the week ahead as market participants speculate the Federal Reserve to normalize monetary policy ahead of its U.K. counterpart, and the pair remains at risk for a further decline over the near-term as the Relative Strength Index (RSI) largely preserves the bearish momentum carried over from the previous year.



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Fundamental Forecast for Australian Dollar: Neutral

• Oil-Driven Drop in Inflation Readings Fuels Interest Rate Cut Bets
• Australian Dollar May Bounce if RBA Opts Against Dovish Posture

The Australian Dollar descended to the lowest level in nearly six years against its US counterpart last week. A deteriorating monetary policy outlook looked like the leading culprit behind the move: traders are now pricing in 61 basis points in easing over the coming 12 months (according to OIS-based estimates compiled by Credit Suisse), making for the most dovish lean in traders’ expectations since early May 2013. Furthermore, investors seem increasingly convinced that the start of the easing cycle is already at hand, with the implied probability a 25 basis point reduction at next week’s RBA meeting swelling to 65 percent. That is the first central bank sit-down to carry a greater-than-even chance of a reduction in borrowing costs in 18 months. Fading realized and expected inflation readings seem to be behind building rate hike bets. Data published last week showed the benchmark year-on-year CPI growth rate slowed to 1.7 percent in the fourth quarter, the weakest since mid-2012. Meanwhile, Australia’s one-year breakeven rate – a measure of expected inflation derived from bond yields – has tumbled to project prices will be expanding at a pace of less than 1 percent by early 2016. That is a far cry of the RBA’s 2-3 percent objective.

The likelihood that the central bank validates the markets’ pro-stimulus posturing depends on its view of the forces bearing down on inflation. Not surprisingly, a formative factor has been the sinking price of oil. Indeed, the aforementioned CPI report showed the “transport” sub-group of index accounted for the largest downdraft in the fourth quarter, of which the most significant contribution was made by a 6.8 percent slide in the price of automotive fuel. Faced with similar circumstances, some central banks have appeared sanguine. The Federal Reserve and the Bank of England have both chalked up recent disinflation to transitory forces that don’t necessarily have a strong bearing on medium-term price stability. Others have gone the other way: the RBNZ conspicuously backed off the hawkish rhetoric on display as recently as December in last week’s policy announcement.

Leading surveys of activity growth in the manufacturing and services sectors point to some loss of momentum since the second half of 2014 but the economy’s overall trajectory seems to remain positive. Realized data outcomes have also increasingly outperformed relative to consensus forecasts since the last RBA outing in December. If this encourages the RBA to look through near-term price declines and fall in with the Fed/BOE side of the argument – catching markets off-guard with another neutral policy statement – a swift Aussie Dollar rebound is likely in the cards.


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The Nikkei as you can see rose during the course of the week, we continue to be consolidative, and as a result we need to get above the ¥18,000 level in order to continue to buy this market. We believe that there is plenty of support at the ¥16,500 level, and that the Bank of Japan will continue to push down the value of the yen, which of course should continue to bring up the value of the Nikkei given enough time. We are buyers of dips, and most certainly buyers of the aforementioned move above the ¥18,000 level.



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The German index tried to rally initially during the course of the week, but as you can see the €10,800 level offered enough resistance to turn things back around and form a shooting star. This suggests that the market could fall, but ultimately we believe that there is enough support below to turn things back around as well. This simply looks like it’s going to be a pullback that should offer a buying opportunity, not some type of meltdown. With that being the case, we think that the DAX is going to offer value here soon, which of course is exactly what we want to see in order to push the market higher.

Keep in mind that the falling euro is of course good for stocks in general, as it should expand exports and also is in theory supposed to increase velocity of money in the European Union. That being the case, a lot of traders will avoid bonds in the European Union, as the ECB is buying them, driving yields down. This forces money into the stock markets and we cannot think of a better place to put your money in the European Union than Germany. After all, it is the engine that drives the European economy overall, so of course it makes sense that the DAX of all indices should be the strongest and most reliable. That’s typically the case, and most certainly will be in this particular circumstance. It may not be where the “hot money” resides, but it is where the stable and longer-term money is. Because of that, we believe that the longer-term move higher should continue, continuing to grind towards the €12,000 level.

We simply look at this pullback as a “heads up” that we can pick up the index cheaply, as we believe that there is so much noise near the €10,000 level that it’s almost impossible to break down at this point in time. Ultimately, with a soft central bank, this market should continue much higher over the longer term, offering plenty of buying opportunities every time it falls.



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The NASDAQ as you can see fell during the beginning part of the week, finding the 4600 level for support. We bounce from there, and as a result we ended up forming a hammer, and it now looks as if the market is trying to build up enough pressure to break out to the upside. The 4800 level above should be broken eventually, but at this moment in time it’s been a bit resistive and therefore we may have to take some time. With that, if we can break above that level we believe that the market will then head to the 5000 handle.



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The S&P 500 fell during the course of the week, testing the 2000 level as a supportive area. That being the case, it appears of the market is ready to go back and forth and eventually go higher. The 2100 level of course is a target, but once we get above there we feel that the market to continue the uptrend that we have seen for so long. However, this week is of course the nonfarm payroll number, so we feel that the market should react to that but ultimately is in an uptrend for a reason.



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