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By XE Market Analysis December 18, 2013 7:12 am
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    XE Market Analysis: North America - Dec 18, 2013

    A rally in sterling following an unexpected dive in U.K. unemployment broke up otherwise subdued pre-FOMC trade in forex markets. EUR-USD remains at familiar levels in the mid-1.37s, and USD-JPY continued to feel gravitational pull around 103.00. The market lacks impetus into the FOMC announcement as the odds of the Fed declaring the commencement of tapering are about the same as a coin flip. Sterling, meanwhile, surged on an unexpected unemployment drop, which fell to 7.4% in October to complete a two-month 0.3 of a percentage point drop. The 99k dive in unemployment the biggest drop in over 13 years, and the drop in the jobless rate is much quicker than the BoE had projected under its forward guidance framework. Cable rallied about 80 pips in making 1.6370 while EUR-GBP dove nearly have a big figure to a low of 0.8403. The release of the BoE MPC minutes showed that members were concerned about currency appreciation, but this evidently had little market impact.

    [EUR, USD]
    EUR-USD remains at familiar levels in 1.37s in subdued pre-FOMC announcement trade, with both upside and downside flurries yesterday having proved short-lived. The market is likely to remain somewhat languid into the FOMC decision today as the odds of the Fed announcing the commencement of tapering of QE assets are about the same as a coin flip. The nine-day low of 1.3709 that was seen last Friday has remained untroubled, however, the euro's recent failures above 1.3800 has painted a technical picture of waning upside momentum, especially with prevailing levels are looking quite stretched above the 50- and 200-day moving averages relative to historical norms. Support comes in at 1.3694-1.3700, the former of which marks last week's low. From the fundamental perspective, ECB President Draghi affirmed the central bank's dovish stance last week, helping offset the central bank's refrain from detailing further non-standard easing measures at the policy meeting earlier in the month, and many analysts are expecting the central bank to commence a QE program next year.

    [USD, JPY]
    USD-JPY continues to feel gravitational pull around 103.00. A rebound in the Nikkei failed to inspire selling of the fund-currency yen and the pair remains in consolidation after posting a multi-year high of 103.92 last Friday. The pull-back low of 102.64 is marked as a support level, which almost exactly matched the current position of the 20-day moving average and a one-month trend support line. The same trend support now comes in at 102.80. A breach of these levels would present the Dec-11 of 102.15 as the next correction target. EUR-JPY and other yen crosses have been seeing a similar price action. We think the risk is to the downside, as the market will likely hedge bets ahead of tomorrow's FOMC announcement given the risk of a tapering announcement, as in the event this would likely be yen supportive should there be a bout of risk-off positioning.

    [GBP, USD]
    Sterling surged on the unexpected unemployment drop, which fell to 7.4% in October to complete a two-month 0.3 of a percentage point drop with the 99k dive in unemployment the biggest drop in over 13 years. The drop in the unemployment rate is much quicker than the BoE had projected under its forward guidance framework. Cable rallied about 75 pips in making 1.6364 while EUR-GBP dove nearly half a big figure to a low of 0.8403. The release of the BoE MPC minutes showed that members were concerned that any further "substantial" appreciation in sterling would slow the recovery, though this has largely been ignored by markets as it's hard to fight against fundamental data. Today's report fits the prevailing status of the U.K. being one of the quickest expanding developed-nation economies. We have continued to target Cable to 1.6500.

    [USD, CHF]
    We expect the safe haven Swiss currency to remain broadly underpinned into this week's FOMC meeting in the U.S. as a significant portion of market participants are anticipating the Fed to commence QE tapering, which in the event has the potential to trigger a more sustained period of risk aversion in global financial markets. EUR-CHF breached support is at 1.2200-1.2205 on Tuesday, trading to its lowest level since April, of 1.2166, taking out what had been our initial target at 1.2179, which was the Apr-21 low. On the topside, a mixture of trend and consolidation resistance shows up at 1.2230 and 1.2250 ahead of the 20-day moving average at 1.2258. We don't recommend investors establish EUR-CHF short positions at prevailing levels as we are nearing the levels where SNB intervention would become a possibility.

    [USD, CAD]
    USD-CAD pair is in consolidation mode after some choppy price action since a three-month rally to 1.0708 was see on Dec-6 (which was the highest traded since 2010). Initial target and support is marked at 1.0560, ahead of 1.0550, which roughly markets a series of former daily highs and lows, should be treated as a key risk level. Clear resistance is at 1.0594-1.0600.

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