FOREX TRADING

EUR/USD closed higher due to short covering overnight as it consolidates some of this month’s decline. Stochastics and the RSI are oversold and are turning neutral to bullish hinting that a short- term low might be in or is near. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If its extends this month’s decline, the 38% retracement level of the 2008-2009-decline crossing is the next downside target.

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Four Days Of History

As global trade goes into the final four days of trade in 2010 it looks as though the market has found a near-term top in dollar index trade, and that the major currencies have reversed and held the near-term selling. History says that December and January are strong for equities and weak for the dollar, and although the equity side has held higher it will take a lot to reverse the Usd gains in what is left of December 2009. Usd/Cad is the only pair that has hardly moved, the other majors all have at least 500 pips of ground to take back, and not a lot of time to do it.

The Daily charts show the recent move from 74.00 to 78.00 on the dollar index as nothing more than a pull-back in what is a very strong short-Usd trend, with moves that have held major Simple Moving Average areas as well as main Fibonacci price points. It will need a concerted effort by all interested parties to make the next move that testes 80.00 resistance.

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This Week’s Market Outlook

Highlights

• USD recovery may reverse into year-end
• CAD strength still in infancy stage
• Treasury supply could send USD/JPY higher still
• Key data and events to watch next week

This week’s report will be 2009′s final The Week Ahead. We will resume updates on January 8, 2009. On behalf of the GAIN Capital Research team and FOREX.com, I would like to wish you a healthy and successful New Year. –Brian Dolan

Note: This week’s report has been finalized earlier than normal (late Wednesday afternoon) due to holiday scheduling. As such, readers should be aware that we do not have the benefit of knowing the weekly closing price levels, and any price points we cite should be interpreted in light of those closing levels. (more…)

Thin Holiday Markets

FX markets were quiet in Asia ahead of the holidays. Regional indexes traded broadly higher, with Shanghai up 2.59%. After yesterday’s weaker than expected US data, it seems that the USD dependence on yields and domestic economic data has become stronger than the year long risk aversion trade.

Most of Europe is closed today and tomorrow is Christmas, when most major markets, with the exception of Tokyo, are closed. Thin liquidity and directionless trading should dominate FX activity. The GBPUSD opened in Asia at 1.5962, powerless to take advantage of yesterday’s broad USD weakness, prompted by weaker US new home sales data.

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The BOJ: The Economy is Picking Up

The monetary policy meeting shows support from bank of Japan to the stimulus plans by stabilizing interest rates at its lowest levels 0.10% that assist in the global demand levels to return again to recovery, which leads to the economic pick up.

The BOJ pointed to that in a mid of the progress contraction that the home and abroad inventory adjustments shows, It referred to that the exports and production showing continues progress due to the witnessed improvements in the global demands especially the demands from the emerged economies.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD bearish momentum was stopped yesterday. The pair failed to move consistently below 1.4250 and the Dollar was weaken significantly after new home sales number unexpectedly fell to 355K. Price topped at 1.4365 and closed at 1.4328. On h4 chart below, we can see that the bearish channel has been violated to the upside indicating potential threat to the bearish outlook. Remember that the bearish momentum in the last three weeks has been attempting to test the long term key support level at 38.2% Fibonacci retracement of 1.2456 – 1.5143 around 1.4127 area. Although it’s too early to say that the bearish momentum is over, the bearish channel violation should keep the long term bullish scenario remains intact convincingly. The bias is bullish in nearest term testing 1.4420 area. Immediate support at 1.4270 – 1.4250 area. Break below that area should keep the bearish scenario intact  testing 1.4170 – 1.4127 area. Break above 1.4420 should be seen as bearish failure and trigger bullish scenario back towards 1.4620 area.

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Dollar Consolidates Gains Before Christmas

Consolidating its recent strong gains, the dollar fell on Wednesday as investors took profits before the Christmas holiday. US personal income and spending rose slightly less than expected in November while new home sales unexpectedly decreased 11.3% m/m. The US economic weakness is temporary, not indicating the economic recovery is faltering. The S&P 500 rose 2.57 to 1,120.59. The yen and euro gained for the first time in seven trading days. Sterling declined modestly, pressured by Bank of England minutes that showed BOE policy makers unanimously kept their bond-purchase plan at £200 billion. The Australian dollar was supported by rising commodity prices. Despite slightly lower-than-expected Canadian GDP growth, the Canadian dollar rose for a fourth day, boosted by Canadian Finance Minister Jim Flaherty’s comments that he wouldn’t be surprised if China and Russia bought the Canadian dollar to diversify their currency reserve holdings.

The dollar index fell from a nearly 3-month high. After breaking its long downtrend, the dollar index surged as investors exited huge short dollar positions. We believe the dollar rally will continue; however, the dollar index, following sharp gains, may require further consolidation before new advances. Today the index found support from the short-term uptrend. There are important supports in the 77 and 76 areas, minor resistances at 78.50 and 79.50 and significant resistance in the 81 area. Thin market conditions over the holidays may exacerbate movements.

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USD Lower, US New Home Sales Plunge 11.3%

• USD: Lower, USD drops from three month high, new home sales post an unexpected decline
• JPY: Higher, US two-year bond yields trade above Japanese two-year yields
• EUR: Higher , EU Libor rates fall to record low
• GBP: Lower, BOE may expand quantitative ease in early 2010, mortgage approvals rise
• CAD and AUD: AUD & CAD higher, China and Russia may add CAD reserves

Overview

Today’s US economic data was mixed with personal income and personal consumption reported slightly below expectation. Michigan consumer sentiment improved. New home sales posted an unexpected sharp decline in October. USD traded lower after the release of much weaker than expected new home sales report. USD traded in a narrow range Wednesday drifting lower from a 3 1/2 month high reached in overseas trade. USD is supported by rising US bond yields and optimism about the US recovery. The main feature of the trade was a focus on the debate over whether the BOE plans to expand quantitative and continued underperformance of the GBP. The Bank of England minutes confirm that the BOE voted unanimously to maintain the current level of asset purchases and interest rates at the December policy meeting. The Daily Mail reports that the BOE may be considering expanding its asset purchases by £25 billion in early 2010. (more…)

Forex Technical Analysis

EUR/USD

Current level-1.4256

EUR/USD is in a broad consolidation, after bottoming at 1.2331 (Oct.28,2008). Technical indicators are neutral, and trading is situated between the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169.

With the recent break below 1.6261, the downtrend has been renewed towards the initial target at 1.4150-70 area. Intraday support can be found at 1.4278, followed by the crucial 1.4373.

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European Market Update

Continental bourses hit 2009 highs – “it’s the most wonderful time of the year”

(GE) German Nov Import Price Index M/M: 0.4% v 0.3%e Y/Y: -5.0% v -5.2%e

(FR) French Nov Consumer Spending M/M:-0.1% v 0.5%e Y/Y: 3.2% v 3.3%e

(SP) Spanish Nov Producer Prices M/M: 0.0% v 0.1%e , Y/Y: -1.8% v -1.7%e

(NV) Netherlands Q3 Final GDP Q/Q: 0.5% v 0.4%e Y/Y: -3.7% v -3.7%e

(IT) Italian Consumer Confidence: 113.7 v 112.7e

(PD) Poland Nov Unemployment Rate: 11.4% v 11.5%e

(NO) Norwegian Oct Unemployment Rate (AKU): 3.2% v 3.2%e

(IT) Italian Oct Retail Sales M/M: 0.0% v 0.1%e, Y/Y: 0.5% v -1.8%e

(UK) BoE Mninutes: Unanimous vote to keep rates and QE on hold in Dec

(UK) BBA Loans for House Purchase: 44.7K v 43Ke

(SP) Spain Oct Total Housing Permits M/M: 14.8% v 59.7% prior, Y/Y: -36.1% v -41.7% prior

In equities: In the last full day of trading ahead of the Christmas Holidays, equity markets in Europe are looking to continue a two day positive run. In trading today, both the DAX and CAC40 set new 2009 calendar year highs. This rotation followed the S&P closing Tuesday at a new year high and strong closes across Asia (ex Japan that was closed for Emperor’s day holiday). As expected, trading in Europe has been light with the FTSE volume down as much as 60% from its average. All sectors on the EuroStoxx50 were in positive territory on little specific corporate news, but broader macro flows as the USD maintained its strength against the GBP, but eased in relation to the EUR. Commodity strength pushed resource names higher in a move that was furthered by commentary from ArcellorMittal [MT.NV] that it planned to acquire further iron ore mine assets in 2010 as it expected prices to continue rising. Tech names also showed outperformance, with Infineon [IFX.GE] continuing to trade higher after its surprise upside guidance in yesterdays session.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, topped at 1.4331 but further bullish momentum was rejected as price whipsawed to the downside, break below 1.4250, bottomed at 1.4216 and closed at 1.4253. Looks like the double bottom support failed to prevent the bearish pressure a this phase. This fact should lead us to further bearish scenario with technical target at 38.2% Fibonacci retracement of 1.2456 – 1.5143 around 1.4127 area which is a key support level from longer term point of view. Break below 1.4127 should be a potential threat to the long term bullish outlook. Immediate resistance at 1.4300 – 1.4330 area. We have seen a very strong bearish momentum this month with no sign of significant upside correction.

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USD Rallies as Existing Home Sales Rise by 7.4%

• USD: Higher, bigger than expected downward revision in Q3 GDP, existing home sales surge
• JPY: Lower, BOJ to combat deflation, government says BOJ effectively set inflation target
• EUR: Lower , Moody’s downgrade of Greece debt rating, German consumer confidence falls
• GBP: Lower, smaller than expected upward revision in UK Q3GDP
• CAD and AUD: AUD lower & CAD higher, Australia’s LEI declines, Canada’s GDP expected to rise

Overview

USD and equity markets continue to trade higher as the inverse correlation for the USD and risk appetite breaks. Investors are liquidating short USD positions and unwinding USD carry trades before year-end. Optimism about the US recovery and speculation that the Fed will begin to withdraw stimulus sooner than expected supports the USD. EUR traded lower as Moody’s cut Greece’s sovereign debt rating and in reaction to report of an unexpected decline in German consumer confidence. EUR downside was is limited by gains in cross trade to the GBP and JPY with GBP pressured by report of smaller than expected revision in UK Q3 GDP and JPY pressured by BOJ pledge to fight deflation and set an inflation target. Commodity currencies traded mixed despite improving equity market trade pressured by weaker crude prices as OPEC leaves oil production levels unchanged. AUD was pressured by report of an unexpected drop in Australia’s LEI. CAD continued to outperform supported by optimism about improving growth outlook in North America. Today’s US economic data was mixed with Q3 GDP revised down more than expected and existing home sales rising more than expected. USD traded to the day’s highs after the release of better than expected existing home sales. USD continues to benefit from improving outlook for the US recovery. Today’s US existing home sales report fuels optimism about the US recovery. (more…)

Dollar Index Swing Point

The initial long-Usd moves in European trade were reversed as the U.S. GDP numbers printed at 2.2%, lower than expected, but were then added to again as Existing Home Sales came in at 6.5M units, which was above the expected 6.3M read. The last leg of Tuesday trade has then been to once again add to long-Usd positions as European markets close.

The pattern for currency markets is to go sideways in afternoon Wall Street trade, but there are signals in the way that forex pairs have split, that today could be different. Long equities, Long dollar, and Short gold and oil, are not things that pm U.S. trade has dealt with too often, and it will be interesting to see this unfold as the dollar takes another wipe out of the euro, cable, and aussie.

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Pound Drops After GDP Report, Cad Strengthens

The currency market followed a pattern similar to the one seen in Monday trade. Despite the positive cash and futures equity markets, the major pairs have failed to move outside of their previous session ranges. The exception was the pound, after the U.K. GDP read disappointed investors once again. The Canadian dollar proved to be the strongest currency against the Usd, being the only one of the majors that actually strengthened against the dollar. Looking ahead, the overall trading volume is expected to remain subdued, as the market prepares for the Holiday break.

Dollar Index Technical View: TheLFB Member Charts

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US GDP

US preliminary Q3 GDP was revised down to 2.8% from original report of a 3.5% rise in the advanced estimate. Despite the downward revision, the improvement in US GDP suggests that the worst of the US recessions is over. According to the Bureau of Economic Analysis the increase in Q3 GDP reflects positive contributions from personal consumption, exports, private inventory investment, federal government spending and residential fixed investment. An increase in consumption and improvement in the housing market helped boost Q3 GDP.

This improvement reflects significant impact of government stimulus to encourage demand for auto sales by the cash for clunkers plan and tax credit for new homebuyers. There is concern that when government stimulus is withdrawn the pace of the expansion may slow with growth limited by the weakness of the US labor market. In addition, the Fed is beginning to lay the foundation for the end of its ultra low interest rate policy and the first steps to exit from quantitative ease. How the economy reacts when the Fed begins to withdraw stimulus will be key to the outlook for US GDP growth in 2010. Columbia University economist’s Stiglitz says there’s a significant chance that the US economy will contract in the second half of 2010. He urges the US government to prepare a second stimulus package to create jobs. According to Stiglitz, the economy must grow by at least 3% to create enough jobs to meet US population growth.

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