Article by ForexTime
Following the unexpected fire sale in global stocks that proceeded the IMF downgrading global economic forecasts last week, I was expecting the European session today to be slightly quieter. Although we may not have encountered the same volatility we did with last Monday’s widespread profit taking on the Greenback, there is still some turbulence going around in the currency markets.
Already today, the S&P 500 has declined to its lowest value in nearly three months, 1912. I was previously anticipating the S&P 500 reaching this level around the same time the Federal Reserve conclude QE (29th October), but the recent profit taking in the stock markets has accelerated the downside move. Like many, I also believe stocks are heading for a correction but I don’t necessarily think the 50 point drop since Friday in the S&P is the beginning of the correction. It’s more likely to be linked to fears over the global economic recovery encouraging investors to take profit on their positions.
The Eurodollar has moved 60 pips higher (1.2697) so far on Monday, with a reduced quantity of economic data released from both the EU and the United States encouraging EURUSD purchasing. I maintain the same bias that the pair is participating in a correction right now, following a few weeks heavy selling. The EU economic sentiment remains bleak and the Eurodollar’s appreciation to 1.27 last week was mostly encouraged by USD weakness. As such, I think it will require further USD weakness for the pair to stay at 1.27 for a meaningful period of time. Tomorrow morning, the latest German ZEW survey is released and if it disappoints, I am expecting the bear run to resume and for the pair to make downside moves towards 1.25 once again.
In regards to the Cable, Mark Carney (Bank of England Governor) attracted headlines for expressing that Eurozone weakness will not dictate when the BoE raise rates. This should reiterate to investors that the BoE remain on course to raise rates in Spring 2015. On Tuesday morning, the latest UK inflation data is released, where a CPI level approaching 2% should remind investors that the BoE are still moving closer to a UK rate rise. However, if the CPI release validates Vince Cable’s recent comments that an overvalued GBP was impacting UK inflation levels, GBPUSD support can be found at 1.6032.
In line with forecasts, the USDJPY pullback is continuing with the pair now trading at 107.275 at the time of writing. This pullback still might not be over quite yet and as long the Federal Reserve continue to move away from dropping a hint regarding the timeframe for a rate hike, the pair can potentially conclude the month around 105. It appears that the Federal Reserve’s FOMC Minutes release may have put the handbrake on the USD rally alongside the JPY strengthening following the Bank of Japan (BoJ) refusing to increase stimulus this month and some increased demand for the safe-haven Yen, following last week’s downgrade from the IMF.
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Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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