Forecasting

Don’t Fight the Fed - Bernanke’s Words Will Drive US Dollar Lower

Fundamental Forecast for US Dollar: Bearish

• US Dollar has held on, but next Dollar move likely lower
• Prepared statements by Fed Chairman Bernanke sink the USD
• Technical forecasts suggest USDOLLAR could fall further

The US Dollar fell against major currencies except the Japanese Yen as the S&P 500 surged to fresh record-highs, and dovish commentary from Fed Chairman Ben Bernanke suggests the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) could fall to fresh lows.

Bernanke put a significant damper on expectations that the Federal Open Market Committee (FOMC) would “taper” its Quantitative Easing measures through its upcoming meetings, and the result was enough to force the Dollar lower across the board. Stock markets likewise breathed a sigh of relief and traders were happy to send the S&P 500 to fresh record peaks. A broader lull in volatility suggests we could see further Dollar weakness and S&P gains through the weeks ahead.

Why might volatility remain low and—just as importantly—what could disturb the market lull?

It all starts and ends with the US Federal Reserve. Bernanke’s infamous “taper” bombshell sparked a financial market panic and sent the Dow Jones FXCM Dollar Index to its highest levels in three years. It seems fitting to note that the dovish shift in Fed commentary has caused similar market ease, and the USDOLLAR fell sharply when Bernanke backtracked on the taper talk. Put simply, the Dollar’s next moves will almost certainly depend on similar shifts from the Fed. As things stand, the Greenback could fall further off of recent peaks.

The coming week’s calendar won’t provide much in the way of potentially market-moving event risk, and indeed that supports the case for low volatility and USD weakness. Possible exceptions include the weekend’s Japanese upper house elections and a late-week US Durable Goods Orders report.

Japan’s elections are likely to cement Prime Minister Abe’s hold of power and reaffirm commitment to so-called “Abenomics”—extremely loose monetary policy and expansionary fiscal policy that has sunk the Japanese Yen. Though unlikely, any surprises could force a substantial Japanese Yen bounce (USDJPY weakness), but financial market volatility could mean Dollar strength elsewhere.

Traders otherwise look to the week’s US Durable Goods orders report to gauge the health of domestic investment activity and future economic growth. We wouldn’t normally watch for big moves on surprises, but the market has become so data-dependent that any particularly big misses could force sharp Dollar moves. Consensus forecasts call for a respectable gain in both the headline figure and the less volatile “Ex-Transportation” result. If we see a sharply better-than-expected gain, the Greenback would likely rally.

There’s a popular saying among traders that seems to hold true in current conditions: “Don’t fight the Fed.” Initially it seemed as though the Fed was likely to begin withdrawing Quantitative Easing measures almost immediately, and all QE-linked trades pulled back sharply. Since then, however, Bernanke and co. have made clear that the next move will have to come on strong economic data.

EUR/USD Forecast August 12-16

EUR/USD had a positive week, breaking long term resistance. Will it continue marching forward? German ZEW Economic Sentiment and GDP releases are the main events on our calendar. Here is an outlook for the main events of the week and an updated technical analysis for EUR/USD.

Strong data was released for the Eurozone’s locomotive, Germany; trade surplus topped market expectations industrial output soared 2.4%. The GDP expectations are now very high. Will Germany keep the euro on high ground? In the US, positive signs and taper talk hardly stopped the fall of the dollar.Let’s Start

Updates: EUR/USD daily chart with support and resistance lines on it. Click to enlarge:

1. German Final CPI: Tuesday, 6:00. German consumer prices advanced 0.1% in June, confirming the preliminary estimate. The reading was preceded by a 0.4% increase in May. Annual inflation increased from 1.5% in May to 1.8% in June. The Bundesbank expects inflation to reach 1.6% in 2013, before declining to 1.5% in 2014. A further climb of 0.5% is anticipated now.
2. German WPI: Tuesday, 6:00. German wholesale price index dropped more-than-expected on June falling 0.4% after the same drop in the preceding month. The reading missed predictions for a 0.3% rise. An increase of 0.3% is expected.
3. German ZEW Economic Sentiment: Tuesday, 9:00. The German economic sentiment released by ZEW revealed caution in July, with a decline to 36.3 from 38.5 in the previous month. Economists expected a rise to 39.8. Investors became more concerned with Germany’s faltering economic growth. German economic sentiment is predicted to reach 40.3.
4. Industrial Production: Tuesday, 9:00. Euro zone industrial output declined in May after four months of gains, down 0.3% after a 0.5% increase in April. This decline was worse than the 0.2 drop projected by analysts, suggesting the Eurozone’s recovery is fragile. The ECB implied it would keep rates at a minimum low to help the recovery process pick-up pace. A gain of 1.1% is forecasted now.
5. ZEW Economic Sentiment: Tuesday, 9:00. German Centre for European Economic Research (ZEW) showed that economic sentiment in the euro-zone edged up unexpectedly to 32.8 in July from 30.6 in June, despite a drop in German economic sentiment. ZEW President Clemens Foster said investors have positive expectations and believe Germany will withhold weaker industrial production and foreign trade data. Another rise to 37.4 is projected now.
6. French Prelim GDP: Wednesday, 5:30. France economy shrank in the first quarter by 0.2%, hit by recession after another fall of 0.2% in the final quarter of 2012. French economy has not showed any significant progress over the year and a recent poll showed that President Francois Hollande’s approval rating has plunged dramatically to 25%. Unemployment remained high and growth continues to slow. The euro-zone’s No. 2 economy is expected to expand by 0.1% this time.
7. German Prelim GDP: Wednesday, 6:00. German GDP demonstrated a hesitant growth in the first quarter, rising by a mere 0.1%, lower than the 0.3% growth rate estimated by analysts. The slow growth was preceded by a 0.7% contraction in the last quarter of 2012, indicating Europe’s largest economy not immune to the euro crisis. German economy is expected to grow 0.6%.
8. French Prelim Non-Farm Payrolls: Wednesday, 6:45. French non-farm payrolls fell less than expected in the first quarter, dropping 0.1% after a 0.3% decline in the final quarter of 2012. Unemployment in France reached 10.2% last year, rising from 9.6% in 2011, Eurostat predicts Jobless rate would pick up to 10.6% this year and rise to 10.9% in 2014. No change is expected in the number of jobs this time.
9. Flash GDP: Wednesday, 9:00. Gross domestic product in the 17-nation euro area declined 0.2% in the first quarter, mainly due to the ongoing recession in France. The Eurozone grown was in contraction since the third quarter of 2011, the longest period of declining output in the eurozone’s history. Germany, which accounts for about 30% of eurozone output, expanded by a mere 0.1% in the quarter, French output fall by 0.2% for a second consecutive quarter adding concerns the Euro area is still in recession. The Eurozone is expected to advance 0.2%.
10. Current Account: Friday, 8:00. The eurozone’s current account surplus narrowed to 19.6 billion euros in May from 23.8 billion euros in April. Analysts expected a smaller drop to 21.3 billion euros. Over the 12 months to May, the current account showed a surplus of 189.5 billion euros, compared with a surplus of 53.3 billion euros a year earlier. Surplus is expected to grow to 21.2 billion euros.
11. Inflation data: Friday, 9:00. Euro-zone annual inflation increased to 1.6% in June, up from 1.4% in May, and in line with market expectations. The rise was largely due to an increase in food and electricity prices. Meanwhile Core inflation, excluding food, energy, alcohol, and tobacco, remained unchanged at 1.2%, as forecasted. CPI is expected to remain 1.6% while core CPI is expected to decline to 1.1%

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week capped under the 1.33 line (discussed last week). It took a bitter struggle, but the pair eventually moved higher and continued to top the 1.3350 level, but all came at a gradual pace. 1.34 eventually capped the pair, and the pair began descending.

Technical lines from top to bottom:

We start from higher ground this week. 1.37 was the 2013 peak, and is still far. 1.3590 capped EUR/USD back in February and is minor resistance.
1.3520 was a swing high in February, before the pair tumbled down. 1.3480 was part of a head and shoulders pattern seen in January and February.

1.3415 was the peak back in June and serves as a strong line of resistance. Beyond this line, it’s a 6 month high. 1.3350 provided support when the pair traded higher in February and weakens now.

1.33 capped the pair quite strongly during July and August 2013. 1.3255 provided support during January 2013 and also beforehand. The line remains strong.

1.3175 capped the pair during July 2013 and works as another line of defense for any moves to the downside. It proved its strength during July 2013 . 1.3100 is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July.

It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, but it is less significant now.

The very round 1.30 line was a tough line of resistance. In addition to being a round number, it also served as strong support and recently worked as a pivot line. 1.2940 is the next line of support. It worked as such during April and May 2013.

Lower, 1.2890 worked in both directions during 2012 and was the beginning of the uptrend support line. It is becoming more important, as a clear separator of ranges. 1.2840 worked as a cushion for the pair during May 2013.

Long term downtrend resistance broken for real

After an initial false break the downtrend resistance line dropping from the February high of 1.37 through the June high of 1.3415 was finally broken, and the pair continue advancing.

Uptrend resistance

Since early July, EUR/USD is running along an uptrend resistance line, and now got a bit far from it.

I am neutral on EUR/USD

We are seeing positive signs on both sides of the Atlantic: Germany’s economy is on the march and Italy is contracting less than expected. In the US, both job openings and the 4 week moving average of jobless claims are at levels last seen many years ago and tapering is closer than it seems.

However, the optimistic summer markets weigh on the dollar and limit gains for the dollar, especially after this trendline has been broken. Strong German GDP can push the euro higher.

5 Most Predictable Currency Pairs – Q3 2013

Each and every currency pair has its own characteristics, typical behavior and sometimes misbehavior. The ones that have a better behavior will hesitate and slow down before a significant resistance or support line and back off. If there is enough momentum and conviction, they will make the break and will never look back. These are the more predictable currency pairs. Unfortunately, not all currency pairs enjoy this behavior, and they tend to be choppy and tricky.

Together with the moves of currencies, also their behavior changes: some improve and others lose their shine. Here is a ranked and updated list of the most predictable currency pairs for Q3 2013, each with its own style:

1. EUR/USD: There is a lot going on in both sides of the Atlantic and this has often triggered choppy and frustrating trading. Euro/dollar was out of the list in Q2, and rightfully so. So why does it rise to the top spot? With stronger volatility and mixed signs on both sides of the pair, we can expect more predictable movement now. First signs are already seen: the pair’s ranges are now better defined. In addition, it is easier to draw uptrend support lines and downtrend resistance lines on the daily charts. After the improvement in range trading, the pair needs more directional trade to lead in predictability. This might happen this summer, with rising expectations of tapering and potentially more action from the ECB.
   
2. AUD/USD: This currency pair topped the list more than once. In Q2, the breakdown below the long term triangle certainly triggered a huge move lower. In addition, the pair makes shooting star and hammer patterns. However, when moving a bit closer, the falls and subsequent corrections were more choppy than usual. So while the bigger picture is clearer, the details are a bit more cloudy. Perhaps the pair suffered too much volatility, but that is probably not going to change soon.
   
3. EUR/GBP: This cross topped the list last time and remains high. Recently it has shown nice range trading and in Q3 we could see some breakouts. When the pair breaks out, it tends to mark the top/bottom of the range and then remain in the range for some time. This might not be the preferred pair for those that need movements of many pips, but for those looking for more stable, predictable moves, it might be the pair of choice
   
4. GBP/JPY: The “dragon” or “geppy” has traditionally not been a very predictable pair, or at least it has been a pair that required wide stops. Well, the moves here remain wild, as the yen moves wildly across the board since Abe took office. But contrary to USD/JPY, the moves in GBP/JPY make more sense: the pound makes the moves of the yen smoother and this will likely continue. The cross traded in well defined ranges and breaks to the upside have seen a follow through. Breaks to the downside have been more problematic. Fresh volatility is expected with a new governor at the BOE and after the Japanese elections.
   
5. NZD/USD: The kiwi is still a relatively good pair to trade, but it has lost some of its shine and predictability. One of the reasons is the interventions by the central bank. Nevertheless, NZD/USD is still worth mentioning. It respects breakouts quite well, even though stops need to be wider than beforehand.

Two major pairs were left out of the list: GBP/USD which makes interesting yet very wide moves, and USD/JPY, which makes even bigger whipsaws. The combination of the yen and the pound seems to work better.



What do you think about this list? Do you agree or disagree? What are your favorite pairs?

Forex - Weekly outlook: August 12 - 16

The dollar recovered from seven week lows against other major currencies on Friday, after slumping earlier in the week amid doubts over how soon the Federal Reserve will start to unwind its asset purchase program.

The dollar regained ground against the euro, with EUR/USD down 0.28% to settle at 1.3341, trimming the week’s gains to 0.64%.

The greenback came under broad selling pressure after the latest U.S. jobs report for July showed that the economy added fewer jobs than expected.

The soft data saw investors reassess expectations on when U.S. central bank would start to taper its bond buying program.

The dollar was higher against the pound, with GBP/USD sliding 0.20% to 1.5505. Sterling remained supported following the release of positive trade data for the U.K. on Friday.

The pound ended the week with gains of 0.98% after the Bank of England revised up its forecast for growth on Wednesday while giving forward guidance on interest rates. The BoE outlined plans to keep interest rates on hold at current record lows of 0.5% until the U.K. unemployment rate falls to 7%.

Elsewhere, the dollar was lower against the yen, with USD/JPY falling 0.47% to 96.24, extending the week’s losses to 2.03%. The dollar fell to a seven-week low of 95.79 against the yen on Thursday.

The Australian dollar rose to a more than one-week high against the greenback on Friday, with AUD/USD jumping 1.04% to 0.9195, after a series of data releases indicated that a slowdown in China’s economy is stabilizing. The Australian dollar fell to three-year lows of 0.8846 on Monday.

Official data on Friday showed that Chinese industrial output rose significantly more-than-forecast in July and consumer price inflation remained unchanged. Chinese trade data released Thursday showed that both imports and exports rose in June.

China is the largest market for Australian commodity exports.

The Reserve Bank of Australia cut its benchmark interest rate to a record low 2.5% following its meeting on Tuesday and said it would continue to adjust monetary policy in order to foster growth and keep inflation contained.

In the week ahead, investors will be closely watching U.S. data on retail sales and consumer inflation, as well as reports from the housing and manufacturing sectors. Second quarter growth data from Japan and the euro zone will also be in focus.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, August 12

Japan is to release preliminary data on second quarter gross domestic product, the broadest indicator of economic activity and the leading measure of the economy’s health.

Switzerland is to produce official data on retail sales, the government measure of consumer spending, which accounts for the majority of overall economic activity.

In the euro zone, France and Spain are to hold auctions of 10-year government bonds.

Tuesday, August 13

Japan is to release data on core machinery orders. The Bank of Japan is to publish its monetary policy meeting minutes, which contain valuable insights into economic conditions from the bank’s perspective.

Australia is to release a private sector report on business confidence.
The U.K. is to produce official data on consumer price inflation, which accounts for the majority of overall inflation.

The ZEW Institute is to release its closely watched report on German economic sentiment, a leading indicator of economic health, as well as data on economic sentiment in the wider euro zone. The euro zone is to release official data on industrial production.

Later in the day, the U.S. is to publish government data on retail sales, import prices and business inventories.

Wednesday, August 14

New Zealand is to release official data on retail sales, while Australia is to publish private sector data on consumer sentiment and official data on labor costs.

The euro zone is to produce preliminary data on second quarter gross domestic product, while Germany and France are to publish individual reports.

The U.K. is to release official data on the change in the number of people unemployed and the unemployment rate, as well as data on average earnings.

The ZEW Institute is to publish a report on economic expectations in Switzerland, a leading indicator of economic health.

The U.S. is to release official data on producer price inflation later Wednesday.

Thursday, August 15

The U.K. is to release official data on retail sales.

Markets in Italy are to remain closed for a national holiday.

The U.S. is to release a series of economic data, with reports on consumer inflation, jobless claims, industrial production and manufacturing data from the Empire state and the Philly Fed.

Friday, August 16

The euro zone is to release official data on consumer price inflation and the trade balance.

Canada is to publish official data on manufacturing sales and foreign securities purchases.

The U.S. is to round up the week with data on building permits, a leading indicator of future construction sector activity, as well as data on housing starts. The University of Michigan is to release its closely watched preliminary data on consumer sentiment.

Euro Risks Weighted to Downside Ahead of ECB, NFPs

Fundamental Forecast for Euro: Neutral

• The Euro continues to struggle despite more signs of improved growth.
• ECB will hold on Thursday – press conference is especially important.
• Regardless of ECB, US NFPs on Friday will have the last word on EURUSD.

The Euro was the second to worst performer on the week, outgaining the Australian Dollar by a mere +0.24%. With risk-aversion gripping the globe amid rising tensions between the United States and Syria, the traditional “safe havens” found their place as the top performing currencies covered by DailyFX Research. The EURUSD dropped by -1.21% to close the week at $1.3220; and the EURJPY eased by -1.78% to ¥129.80.


Declines haunted the single currency as further signs of improved growth prospects in the region failed to attract buyers. Considering that the Euro has remained elevated for the past several weeks but has thus far struggled amid stronger data, it appears that the Euro – and Europe on the whole – has become a short-term safe haven from plunging emerging markets.


While the emerging market fears aren’t going to go away anytime soon, it’s clear that the risk to the Euro is weighted to the downside: strong data is failing to inspire further gains; and even slightly disappointing news is attracting sellers more commonly. This week, with the first revision to the 2Q’13 Euro-Zone GDP report due and no change in the report figures (+0.3% q/q expected unch; -0.7% y/y expected unch), it is unlikely the Euro sees a boost on the organic-data side of the equation.


This secondary theme – that the Euro isn’t rallying on signs of a broader recovery – will exhibit itself multiple times throughout the week amid the final August PMI readings due for the Euro-Zone’s major economies. Like in the case of the GDP figure on Wednesday, these data, despite their positive inclinations, will do little to spur upside momentum.


Indeed, there are two headline themes this week, one at home and one abroad for the Euro. On Thursday, domestic issues come front and center when the European Central Bank will unveil its latest policy decision. A hold is expected all around, with the main rate at 0.50% and the deposit facility rate at 0.00% - duly no cut to a negative interest rate. However, the first theme – the intensity of ECB President Mario Draghi’s discussion on inflation and credit growth – could prove to be a negative influence on the Euro.


The ECB, like most central banks in developed economies, relies on inflation as a temperature reading of economic activity; and when the thermometer is at +2% yearly, that’s when the ECB finds its polices are working best. When inflation is at +2% yearly, economic growth is moderate, but not too fast to spur runaway prices; and moderate inflation means the central bank can keep interest rates lower to support credit growth. That is why this past week’s round of inflation data is so concerning for the Euro, notes Currency Strategist Ilya Spivak.


I agree with my colleague but I think the implications are more geared towards credit growth rather than inflation; Germany, after all, despises inflation and is certainly cheerful that hyperinflationist fears haven’t manifested themselves amid seemingly endless monetary easing.


Credit growth was a main concern for ECB President Draghi at the last post-meeting press conference, despite signs that growth had turned higher (it has, and credit growth remains weak). Indeed, a look at Euro-Zone excess liquidity shows that capital levels have fallen back to pre-LTRO1 levels, which of course precipitated liquidity injections totaling over €1 trillion beginning between December 21, 2011 and February 29, 2012. So, while the ECB may not want to cut rates again given the near-term pick-up in growth prospects, it may be thinking about implementing another liquidity injection to help spur credit growth (which would hurt the Euro).


While the ECB addresses credit growth, the US labor market report – the hallowed NFPs – will guide the US Dollar. Ultimately, when all is said and done, the US Dollar will guide the Euro. Given the sensitivity of markets to September taper talk, forex traders will likely find that this Friday’s US NFP report will upend the Euro – quite possibly violently in either way depending upon the print.

Gold Posts Largest Drop Since June Ahead of Fed- Bearish Below $1373

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Fundamental Forecast for Gold: Neutral

• Gold Breaks Channel Support; Larger Bear Resumption?
• Gold, Crude Oil Eye US Data as Fed Taper Speculation Swells

Gold prices were markedly weaker for the third consecutive week with the yellow metal plummeting more than 5.2% ahead of the New York close on Friday. The losses mark the largest single week decline since June and come ahead of next week’s highly anticipated FOMC policy meeting where investors will be closely eying the taper timetable and the updated forecasts from the committee. Until then, bullion remains at risk heading into next week after breaking below key technical support.


Inflation data early next week will be central focus ahead of central bank policy meeting with consensus estimates calling for a print of 1.6% y/y for the month of August, down from 2.0% y/y in July. Interestingly enough, core CPI 9ex food & energy) is expected to uptick to 1.8% from 1.7%. Although inflation data has remained rather well anchored at or below 2% since the start of the year, it has been on the rise for the past 4-months and the print could impact help support gold prices ahead of the Fed with a stronger than expected read, specifically in core prices. Should the data come in line with expectations or weaker, look for prices to remain under pressure as the appeal of gold’s anti-inflationary hedge abates and expectations of Fed tapering weigh on demand.


The street is now widely expecting the Federal Reserve to begin tapering asset purchases in the amount of $10 Billion next week with price action in gold and treasuries both suggesting the move may have already been priced in. This month is not your run of the mill meeting- we get the Bernanke presser as well as the updated quarterly forecasts from the committee as they pertain to growth, inflation, unemployment and interest rates. As such, expect a surge in market volatility with gold to come under pressure in the unlikely event the size of the taper is more aggressive. On the back of last week’s mixed NFP print, it’s likely the central bank will take a cautious approach to the “taper talk” as Bernanke tries to limit the spillover effect and gradually end the easing cycle.


From a technical standpoint, gold broke through key technical support this week at $1356 (representing the confluence of the 100% Fibonacci extension off the August highs, the 100-day moving average and channel support dating back to 2013 low made back in June). The move reaffirmed our bias and triggered all three price targets noted in this week’s scalp report before settling just above the $1297- $1306 support zone. Note that daily RSI is now below the 40-threshold for the first time since early July and marks the first directional breaks sub-40 since the mid-June decline. Only a breach above $1373 invalidates the broader decline off the August highs with a break below support targeting near-term objectives at $1268-$1276 and $1234. With that said, we will maintain a neutral bias heading into FOMC noting our invalidation levels and price targets.

Australian Dollar Rebound to be Tested by RBA Minutes, FOMC

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Fundamental Forecast for Australian Dollar: Bullish

• Aussie Dollar Rebound Launched Alongside Shift in DailyFX SSI on China Stabilization
• RBA Meeting Minutes Sought for Confirmation of a Shift to Neutral on Rates Outlook
• FOMC Rate Decision May Undermine Aussie Recovery if Fed Signals “Taper” Cycle

We’ve argued in favor of a significant Australian Dollar recovery since early August. We noted that an improvement in Chinese news-flow will probably help stabilize economic growth expectations for the East Asian giant. China is Australia’s largest trading partner and a critical source of demand for the country’s pivotal mining sector. That meant that stabilization in China was likely to translate into an improved the outlook for Australian exports and the business cycle overall. This in turn would prompt a supportive shift in RBA monetary policy expectations and lay the groundwork for an Aussie recovery. The case for an upside scenario seemed all the more compelling given a backdrop of highly over-extended speculative net-short positioning and we proceeded to enter long AUD/USD after an attractive technical setup presented itself.

A cautious recovery now seems to be underway as expected. However, the week ahead will see the Aussie’s resilience severely tested as the currency takes on high-profile event risk on both the domestic and the global front. Minutes from September’s RBA policy meeting are first to cross the wires. That sit-down produced what the markets interpreted as a shift away from an overtly dovish posture to a neutral one, sending the Australian unit sharply higher and igniting pent-up bullish forces waiting for their cue to overtake momentum. With that in mind, traders will be keenly interested to parse the minutes for confirmation of the tone shift gleaned from the initial policy statement. It is rather rare for RBA meeting minutes to deviate materially from the Governor’s remarks released along with the rate decision. The potential for volatility remains however, and a stray comment that is perceived to amplify or undermine the latest improvement in the Aussie’s policy profile can send the currency higher or lower, respectively.

Thereafter, macro-level forces come into focus as all eyes turn to the Federal Reserve as the policy-setting FOMC committee convenes for its monthly meeting. The outing is expected to produce the first “taper” of the QE3 stimulus program, with the baseline scenario calling for a $10-15 billion cutback in monthly asset purchases. The path forward beyond that remains highly uncertain however. That means the FOMC’s updated set of economic forecasts as well as Chairman Ben Bernanke’s press conference following the policy decision will be surrounded with plenty of speculation and offer ample fodder for volatility. If investors are met with Fed rhetoric that (directly or indirectly) argues in favor of a sustained QE reduction cycle into the end of the year, market-wide risk sentiment is likely to deteriorate and pull the Aussie Dollar downward. A more cautious approach that presents a Fed that still sees stimulus withdrawal as highly data-dependent and injects uncertainty into the near-term policy outlook stands to produce the opposite dynamic.

The Week Ahead: Will the Double Digit Gains Hold?

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As we approach another financial crisis in Washington, a scene that may be repeated next month, many are wondering whether or not they should be invested in stocks. The year to date gain in the Spyder Trust (SPY) of over 18.4% is well into the double-digit territory I expected at the end of 2012. Of course the question is how will stocks do in the fourth quarter? But will the market be able to hold these gains until the end of the year?

January’s 4.6% gain reinforced the positive view and, as I noted on February 1st, “that since 1929, a higher January close in the S&P 500 has resulted in an average 13% gain.” In that column, I pointed out that the best prior January was in 1997 when the S&P 500 finished up 31% for the year. There were several wide swings that year, as one had to endure a 13.6% drop in October, before the S&P 500 finished the year near its highs.

I also shared examples of 2001 and 1994 when strong January gains still resulted in a down performance for the year. I do not think this will happen in 2013, as the patterns of those years were much different. If we do get weekly sell signals, we will give up a chunk of the current gains before moving higher into the end of the year.

Asset values have improved markedly from the recession lows, as this WSJ chart illustrates. Pensions, as well as cash and other assets, have moved above the pre-crash highs. Stocks and bonds are close to the 2007 highs, as is real estate. Another positive is that the debt levels have improved.

Of course, the concern now is that the impasse in Washington will derail the recovery and that the higher mortgage rates will slow down the housing markets. As the Wall Street Journal pointed out, “Economic output would actually have contracted in both late 2012 and early 2013 if it hadn’t been for solid gains in consumer spending.”

Consumer sentiment has had a rough month, as Friday’s release of the final month reading from the University of Michigan was 77.5. It had been above the 80 level for the past several months. The positive uptrends for both consumer sentiment and consumer confidence are still intact

The bond market appears to have had a pivotal trend change since the FOMC announcement, as yields on the 10-Year T-Note (TNX) have dropped from just under 3% to 2.614% on Friday. I have been looking for a pullback in yields for the last two months, but it certainly took longer than I expected.

The weekly chart shows the completion of the reverse head and shoulders bottom formation in May that was supported by the positive signals from the MACD. The break of initial support, line a, is consistent with a further decline in yields and the MACD is now moving into the sell mode. Therefore, a further decline to the 2.40% area is clearly possible.

The news out of the Euro zone continues to improve, but their major stock markets, like the German DAX, have also pulled back from their all-time highs. The GDP numbers out of China were also better than expected, and while the emerging markets are below their September highs, they still appear to be in the bottoming process.

It was another mixed bag of economic news in the US, as the flash PMI Manufacturing Index came in at 52.8, below the 54 reading that most were expecting. The Richmond Fed Manufacturing Index was unchanged and Consumer Confidence dropped to 79.8 from a prior month’s reading of 81.8. The Durable Goods and New Home Sales were both better than expected, even though the prior month’s Durable Goods were revised downward.

As the chart indicates, the third estimate for GDP was unchanged at 2.5%, which was well above the economist’s estimate of 1% growth at the start of the second quarter. The third quarter forecast is for growth of 2.3%.

This week we will get several new readings on the health of the manufacturing sector. Monday, we get the Chicago PMI and the Dallas Fed Manufacturing Survey, followed on Tuesday by the PMI Manufacturing Index, along with the ISM Manufacturing Index. Weak numbers, combined with a shutdown of the government, could further frighten investors.

This, of course, is the week for the monthly jobs report, which is preceded on Wednesday by the ADP Employment Report. Last week’s jobless claims were better than expected, as the chart shows a clear downtrend in both the raw data and the 4-week average. We will get new numbers on Thursday, along with Factory Orders, and the ISM Non-Manufacturing Index.

What to Watch

Last week I wondered “How Long will the Fed High Last?” So far, the answer seems to be not too long. I was looking for stocks to turn around by the middle of the week and Thursday’s close, along with the strong earnings from Nike Inc. (NKE) was encouraging.

The selling, however, resumed overnight, as most stocks had a solid week on the downside The S&P futures and Spyder Trust (SPY) triggered weekly low close doji sell signals. The cash S&P 500 and Nasdaq 100 did not.

Several of the positive technical signals I reviewed last week have deteriorated or reversed course, as the short-term momentum is negative. So far, the selling has not been heavy, so the A/D lines, for the most part, have not broken important support.

It is a concern that the five-day MA of the S&P 500 stocks above their 50-day MAs has turned down before reaching its downtrend, line b. It is now back below the mean at 66 and is clearly diverging from the price action, line a.

Still, there are quite a few stocks that have just moved out of nice bottom formations like the homebuilders. They do not look ready to drop below the August-September lows, but need a good up day to turn the momentum positive.

Also on the Positive side is the Dow theory, as both the Dow Industrials and Transports made new highs, along with the Mass Index that shows no signs yet of a major trend change.

The sentiment has turned more cautious, but 36.5% of the individual investors are still bullish, which is still on the high side. The neutral investors have risen from 25.2% last week to 33.3% this week, suggesting that some have moved to the sidelines.

S&P 500

The Spyder Trust (SPY) closed the week right on its 20-day EMA, as the short-term support in the $170-$171.20 area was broken early in the week. The daily starc- band is at $166.90 with the uptrend, line f, in the $166 area.

The 20-week EMA, which was tested in August, is now at $165.34, with the weekly starc- band now at $160.23.

The daily on-balance volume (OBV) dropped below its WMA last week and the WMA has now flattened out. It will be important that the OBV moves strongly above its WMA on any rally this week, since it did confirm the recent highs. The OBV has stronger support at line g. The weekly OBV (not shown) is still above its WMA and did confirm the highs.

The daily S&P 500 A/D line closed the week below its WMA after also confirming the post FOMC price highs. It is still above the support from April and June at line h.

The preliminary monthly pivot for October is at $169.02 with daily resistance now at $170.17. A close above this week’s high at $170.65 would be a short-term positive.

Dow Industrials

The SPDR Dow Industrials (DIA) opened below the prior week’s lows, which is not a good sign. It is still the weakest of the major averages. It closed the week on next month’s pivot at $152.28, with further support in the $150-$151 area, which includes the 20-week EMA. The weekly starc- band is considerably lower at $144.73.

The Dow Industrials A/D line (not shown) has declined steadily over the past seven days and has closed well below its flat WMA.

The daily OBV has dropped below its WMA, while the weekly is still above its WMA. Therefore, the multiple time frame OBV analysis is now mixed and neither confirmed the new price highs.

There is initial resistance now at $153.50-$154 with the daily starc+ band above $155.

Nasdaq-100

The PowerShares QQQ Trust (QQQ) just slightly higher last week, but the relative performance analysis still indicates that it is a market leading sector. There is initial support now in the $77.50-$78 area with further at $76-$76.50. The monthly pivot for October is at $78.13.

The daily OBV did confirm the price highs, but is now testing its WMA and the uptrend from the June lows, line b. A drop below the August lows would be more negative. The weekly OBV and RS analysis (not shown) are positive with the RS line rising sharply.

The daily Nasdaq-100 A/D line is still in an overall uptrend, but has lost some upside momentum. It failed to move above the august highs on the last rally, which is a concerning sign. The A/D line has next good support at line c.

A daily close above the $80 would definitely reassert the uptrend with October’s monthly projected high currently at $82.27.

Russell 2000

The iShares Russell 2000 Index (IWM) also held firm all week and closed well above the still rising 20-day EMA at $105.31. The daily starc- band is at $104.39 with major support in the $100-$102 area.

The daily OBV, and weekly on balance volume, both have confirmed the new highs and are above their still rising WMAs.

The Russell 2000 A/D line turned positive in early September by moving above its WMA, but has failed to make new highs with prices. This divergence would be confirmed by a drop below the August lows and support at line g.

The daily relative performance made new highs last week with short term resistance now at $107.62. The daily starc+ band is at $109.07.

Weekly outlook: October 14 - 18

The dollar was higher against the yen on Friday, amid hopes for a breakthrough on an agreement to end the U.S. government shutdown and raise the debt ceiling in time to avert a sovereign debt default.

Investor confidence was boosted as House Republicans and the Obama administration began a second day of negotiations on a deal to reopen the government and raise the U.S. debt ceiling for six weeks.

The U.S. risks running out of cash if the government borrowing limit is not raised by 17 October.

USD/JPY ended Friday’s session at 98.56, up 0.40% for the day. For the week, the pair gained 1.93%.

The euro moved higher against the dollar as market sentiment improved, with EUR/USD up 0.14% to settle at 1.3540, and ending the week 0.30% lower.

Concerns over economic impact of the U.S budget and debt ceiling impasse fuelled expectations that the Federal Reserve will further delay plans to start phasing out its USD85 billion a month asset purchase program.

Wednesday’s minutes of the Fed’s September meeting said the decision not to begin tapering stimulus was a "close call," with all but one voting member opting to leave the program unchanged.

Data released on Friday showed that U.S. consumer sentiment fell to the lowest level in nine months in October, as concerns over the impact of the government shutdown weighed.

The University of Michigan’s consumer sentiment index declined to 75.2 from a final reading of 77.5 in September, and below expectations for a reading of 76.0.

Elsewhere, the pound was lower against the dollar on Friday, following the release of data showing that U.K. construction sector output unexpectedly fell by 0.1% in August. Earlier in the week, data showed that industrial and manufacturing output also dropped unexpectedly in August.

GBP/USD slipped 0.13% to settle at 1.5946, and ended the week with losses of 0.94%.

In the week ahead, investors will continued to closely monitor political developments in Washington. On Monday, markets in the U.S. and Canada are to remain closed for the Thanksgiving holiday.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, October 14

Markets in Japan are to be closed for a national holiday.

Australia is to release data on home loans, an important indicator of demand in the housing sector.

China is to publish data on consumer inflation, which accounts for the majority of overall inflation.

Switzerland is to release data on producer price inflation, a leading indicator of consumer inflation.

The euro zone is to release data on industrial production.

Markets in the U.S. and Canada are to remain closed for the Thanksgiving holiday.

Tuesday, October 15

The Reserve Bank of Australia is to publish its monetary policy meeting minutes, which contain valuable insights into economic conditions from the bank’s perspective.

The U.K. is to produce official data on consumer price inflation and producer price inflation.

The ZEW Institute is to release its closely watched report on German economic sentiment, a leading indicator of economic health, as well as data on economic sentiment in the wider euro zone. The euro zone is to release official data on industrial production.

The U.S. is to release a report on manufacturing activity in the Empire state.

Wednesday, October 16

New Zealand is to release data on consumer price inflation.

The U.K. is to release official data on the change in the number of people unemployed and the unemployment rate, as well as data on average earnings.

The ZEW Institute is to publish a report on economic expectations in Switzerland, a leading indicator of economic health.

The euro zone is to release data on consumer price inflation.

Canada is to produce data on manufacturing sales, a leading economic indicator.

Thursday, October 17

Australia is to publish a private sector report on business confidence, an important economic indicator.

The U.K. is to produce data on retail sales, the government measure of consumer spending, which accounts for the majority of overall economic activity.

The U.S. is to publish the weekly government report on initial jobless claims, as well as data on manufacturing activity from the Philly Fed.

Friday, October 18

China is to release data on third quarter gross domestic product, the broadest indicator of economic activity and the leading measure of the economy’s health, in addition to data on industrial production.

Canada is to publish data on consumer price inflation.

Euro Gaining vs. Dollar but Struggling Elsewhere amid Middling Data

Fundamental Forecast for Euro: Neutral

• Neither the German ZEW surveys nor the Euro-Zone CPI report helped the Euro.
• The EURUSD is within 1% of its yearly highs; but that’s a function of USD-weakness, not EUR-strength.
• Euro at risk amid resolution of US data backlog.

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British Pound Looks Dangerously Overstretched - How do We Trade?

Fundamental Forecast for the British Pound: Neutral

• The GBPUSD looks overstretched as it surges but remains below major highs
• UK Q3 GDP figures, Bank of England Minutes, and US labor data warns of sharp short-term swings
• We’ll need a big surprise from economic data to force the GBPUSD out of its trading range

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Japanese Yen Strength to Be Undermined by Slowing Inflation

Fundamental Forecast for Japanese Yen: Neutral

• US Government Reopening Means Data Backlog Ends - What to Watch For
• USD/JPY Nearing Multi-Month Triangle Apex

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Gold Eyes Monthly High Ahead of NFPs as Bearish Momentum Falters

Fundamental Forecast for Gold: Neutral

• Gold Reverses Through Trendline; Resistance at 1330
• Dollar Hits Five-Month Low as SPX 500 Sets Record High