With U.S. markets closed for Presidents Day and most of Asia off for Chinese New Year, it was no surprise to see quiet trading yesterday in the FX market. The U.S. dollar, which was hit hard last week rebounded against the Japanese yen and consolidated against other major currencies. At the start of the NY trading session the dollar saw some positive traction but quickly gave up those profits into the London close. This left pairs like EUR/USD, GBP/USD and AUD/USD right where they ended Friday trade. While there’s not much in the way of market moving U.S. data, there are 3 things that I’m watching this week.
First and foremost, currencies will take their cue from equities. Last week’s recovery in stocks took the S&P 500 to 2,750, which is a very important level. If the index manages to break above 2,750, which is one of the main levels that it broke down from in early February, the 20-day SMA and the 100-SMA on the 4 hour chart, the dead cat bounce will turn into a stronger rally that could take the index back to 2,800. However if Friday’s rejection holds and the S&P 500 drops below 2,715 we should see a stronger reversal down to 2,650. This is important for currencies because in this current environment, nothing matters more than risk appetite. Therefore, a continued recovery in stocks means a continued rally for EUR/USD, GBP/USD, AUD/USD and even USD/JPY now that the questions surrounding Japan’s next central bank Governor have been resolved. However if Friday’s fizzled rally turns into a deeper correction, all of the major currency pairs will extend their losses, so USD/JPY could take another trip below 106.
I’ll also be watching the euro this week because the Social Democrats begin voting on Merkel’s coalition government. They have until March 2nd to file their votes and the outcome will be announced on March 3rd. There are also a number of important economic reports scheduled for release starting with Tuesday’s German ZEW survey. It will be difficult for investors to remain optimistic after the nearly 9% drop in the DAX from its high on January 23rd. Even if stocks are stabilizing, investors have become dismayed by the recent correction and skeptical of the equity rally, which is why we believe ZEW will fall, reflecting weaker investor confidence. The Eurozone’s February PMI and Germany’s IFO reports are also due for release this week and they are expected to be softer as well. Then in 2 weeks, Italy holds its general election and the ramifications for the European Union are significant. On a technical basis, 1.2550 is very significant resistance for EUR/USD and if this week’s economic reports are sufficiently weak and U.S. stocks fail to extend their gains, it would create the perfect environment for a correction to 1.22. But for that to happen, we need to see EUR/USD break below its 20-day SMA near 1.2350 first.
This week’s U.K. labor market report will also determine how quickly the Bank of England raises interest rates. Speculators are banking on a move in May but if Wednesday’s labor data fails to live up to expectations, those odds, which currently sit at 76% could sink quickly. According to the PMIs, January was a very strong month for job growth but everyone’s focus will be on wage growth as it’s a measure of inflation. Average weekly earnings growth has been hovering at its highest level in 2017 for the past 2 months which is difficult to maintain so if wage growth slows, we could see a more meaningful correction in GBP/USD. Bank of England Governor Mark Carney did not touch on monetary policy or the economy in his speech yesterday but these topics will be unavoidable when he testifies on the Inflation Report before the Parliament’s Treasury Committee on Wednesday.
This is also an important week for the New Zealand dollar, which fell for the second consecutive trading day on the back of softer economic data. Unlike the manufacturing sector, service sector activity slowed slightly in the month of January. Producer prices were released last evening, followed by a dairy auction on Tuesday and retail sales on Thursday. Dairy prices have been trending higher and another monthly increase is necessary for NZD/USD to hold onto its gains. Technically, the pair appears prime for a reversal as 74 cents proves to be important resistance. No economic reports were released from Australia and Canada as AUD and CAD moved in opposite directions. AUD/USD ticked up while USD/CAD steady.