It was an eventful week, as some of the major events of the week were lowering of Spain’s long term credit rating by two notches to BBB+ on debt concern and downgrading of India’s outlook from stable to negative by S & P. Spain and then UK have officially announcing that the two countries are facing recession.
FED and BOJ left its interest rate unchanged, but Bank of Japan (BOJ) continued with its asset purchase program by increasing its size by another Yen 5-Trillion (USD 62 Billion).
Earlier, European market remained nervous after the first round of French election, as Hollande took lead over Sarkozy, which is a big concerning factor for the Euro-zone leaders because Hollande prefers growth over austerity that negates European policy maker’s stance.
French voting trend is surely dominated by the economic factors due to rising unemployment caused by sluggish growth. 2nd round of election is due this Sunday (May06). Opinion polls suggest that Hollande has once again taken lead by 9-10 pct, which could cause volatility in financial market before weekend. But if Sarkozy could make a comeback, it will hugely benefit the European currency
Market sentiment is quite mixed due to unclear global trend. Until now global market was hoping for continuation of US economic growth. Recent US data’s showed signs of weakness, which was further confirmed after the release of 1st quarter US GDP report, as economy grew by 2.2 pct that was lower than the market expectation.
I think next week’s non-farm payroll will provide with better clue to the market, as weak number would endorse GDP report and increase the chances of QE3, but strong data could change market sentiment.
Interestingly, currency market is faced with a very precarious situation. Euro is gaining despite European unrest. There is recession in UK, but Pound Sterling is at 20-months peak against Euro. According to OECD and Swiss National Bank (SNB) Swiss Franc is highly overvalued because of which the country’s exports are suffering and therefore, SNB has to constantly intervene to defend its floor of 1.20 against Euro to weaken its currency. Japan is in deflation and with 200 pct debt it is top amongst the debt nations, but Yen continues to make strides.
So the bottom line is that all major economies are faced with severe economic difficulties, but market/investors sentiment shifts towards the least bad economy and with US growing over 2 pct is certainly best placed. Therefore, USD softness will be short lived.
One more factor that supports EURO is SNB intervention to defend 1.20 EURO/SFR floor, as it had to buy Euro against selling SFR, which also helps Euro to make gain against USD.
One of the most important events of the week was FED Reserve Chairman’s statement of keeping strong monetary policy. He was of view that US economy is on recovery path, but more worrisome factor is high unemployment and slow growth in the housing market, which means more importantly FED’s focus is to bring down the unemployment rate to between 7.8 pct to 8 pct by the year end. The crux of his speech on policy rate was that “Fed will act if needed”.
Therefore, US economic data will continue to be the key factor that will provide hint about Fed’s next move of its easing policy. Though, I do not consider US GDP growth of 2.2 pct as bad number keeping in view deflationary and recessionary condition and slow pace of growth in the major world economies.
On Monday, market will be watching US Core Price Index, Personal Income and Chicago PMI. On Tuesday morning, market will be focusing on Australian Interest Rate decision, which is likely to be slashed due to slowing down of Australian economy. Later in the day US ISM Manufacturing Index also known as Purchasing Manager Index will be keenly watched to determine service sector growth. Anything around 55 considered good the economy, but a figure around 50 is average.
On Wednesday, German and European unemployment data will provide more evidence about job situation in the region. On the same day US will be releasing important Non-Farm Payroll data, a number above 200.000 will disappoint all those favoring QE3 and USD will gain strength.
On Thursday, UK’s housing price index will indicate inflation trend and on the same day ECB will take decision on interest rate which is likely to remain unchanged at 1 pct.
On Friday, Euro-zone retail sales number will provide clue about consumer spending in the region, but market will remain nervous due to weekend 2ns round of French election.
GOLD @ $ 1662.40 = Gold moved in line of my last week’s forecast hitting target $ 1625 before bouncing back nicely after failing to penetrate the support level to hit the upper target of $ 1668. The surge came in anticipation on easing prospect after disappointing GDP data, which found support from Ben Bernanke’s statement that FED has not ruled out another stimulus.
Initially bias for Gold is on the upside and therefore buying interest will be seen around $ 1655-58. A break o$ 1672 would encourage for test of $ 1680. Strong US data could change the Bullish sentiment and therefore, I consider any move beyond $ 1672 risky and I would prefer to pick the top to sell the yellow metal. On the downside, break of $ 1652 will confirms more losses probably $ 1635 will be tested and may surrender.
EURO @ 1.3254 = I will remain cautiously bullish for Euro as long as it stays above 1.3150, as the European currency is likely to find buying interest around 1.32. A break of 1.3298 is required to test 1.3320. However, this optimism should be short lived and I will look for levels to sell beyond 1.3320. Only break of 1.3380 will push Euro towards 1.3420. Ranges for the week 1.3040 – 1.3380
GBP @ 1.6263 = Cable saw a perfect up move to hit my weekly target of 1.6255 and still looks good. As long as GBP hold 1.6140, the surge is likely to continue. A break of 1.6295 could push Pound Sterling towards 1.6350-80 zones. However, fall below 1.6070 confirm top seen. Ranges for the week 1.6050 - 1.6380
YEN @ 80.24= This is my 5th successful week to call Yen correctly as Japanese currency continued to enjoy its lost strength and bounced back from 81.63 to break resistance level of 80.80 missing target 80.10 by a whisker.
Yen is likely to hold 81.20 and a break of 79.80 will encourage for a test of 79.50 or probably 79.20. However, push beyond 81.80 would delay the move. Ranges for the week 79.20 – 81.50
CHF @ 0.9062 = Swiss Franc has strong resistance around 0.9020-30, which may not be easy to penetrate. The threat of SNB intervention could see a bounce back, but test of 0.90 cannot be ruled out. However, correction could push the currency towards 0.9110 or 0.9145. Ranges for the week 0.8985 – 0.9150.
EurO & GoLD tO GaiN BeforE FallinG - ApR 23-27