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Comprehensive FX and Futures Commentary

FastBrokers Research Team from FastBrokersFX at 02/19/10


Daily Market Commentary

EUR/USD Bounces Above 1.35 After Another Heavy Selloff

The Selloff in the EUR/USD and the risk trade continued yesterday. Investors are still concerned about the ability for Greece to enact its fiscal austerity along with debt worries in other Mediterranean nations. Additionally, the Fed shocked markets by raising its discount rate by 25 basis points, signaling that the emergency window may be closing. Investors reacted by buying up the Dollar across the board, sending the Euro below its highly psychological 1.35 level. However, the Euro is bouncing from intraday lows after the EU Flash PMI data set printed mix. Although services production slipped across the board and France slowed altogether, manufacturing in Germany shot up from 53.7 to 57.1, eclipsing analyst estimates of 54.1. Additionally, Germany’s PPI grew the most since August 2008 while the EU’s Account Balance rose for only the 2nd time since the inception of the economic crisis. Hence, it seems demand for German manufactured goods is climbing, leading to an increase in exports and consequently a positive Current Account. Although today’s data does show the EU’s economic recovery is slowing, Germany provided a silver lining and is giving investors a reason to support the Euro after heavy declines. The change in sentiment is reflected in a large move higher by the EUR/GBP as investors react to discouraging UK Retail Sales data. Meanwhile, investors are awaiting U.S. CPI data. We’ve seen prices rise across the globe and it wouldn’t be surprising if U.S. consumer prices also outpaced expectations. In fact, the Fed could have raised rates at the discount window in advance of such a turn of events, but we will have to see. Investors should also keep an eye on how U.S. equities react to the Fed’s decision to lift the discount rate since it occurred after the close yesterday.
Technically speaking, we’ve formed some new uptrend lines for the EUR/USD and the 1.35 area could serve as a technical cushion for the time being. As for the topside, the currency pair faces multiple downtrend lines along with 2/12 lows and 2/18 highs should they be reached. That being said, the EUR/USD is in blue territory due to the lack of near-term activity in this area to serve as technical levels. Hence, the EUR/USD could continue to fluctuate wildly until establishing a new range.

Present Price: 1.3517
Resistances: 1.3532, 1.3543, 1.3559, 1.3570, 1.3582, 1.3592
Supports: 1.3509, 1.3486, 1.3473, 1.3456, 1.3440
Psychological: February lows, 1.35

GBP/USD Pounded in Wake of Fed Action and Weak Retail Sales

The Cable has undergone an intense selloff in the midst of a broad-based Dollar rally following the Fed’s surprise decision to raise the rate at the discount window by 25 basis points. Although 25 basis points may not be a large figure, the move led to a shift in investor mentality by signaling that the emergency window may be closing. Hence, yesterday was a statement that the Fed is truly gaining confidence in the economic recovery. The Dollar shot up in reaction and the Cable has endured heavy losses as a result. Additionally, UK Retail Sales disappointed by printed 7 basis points below analyst expectations (-1.2% vs. -0.5%E). The re-issuance of the VAT and adverse weather conditions likely weighed on consumption. However, the number is still discouraging because it’s the largest decline since March 2009. The Pound gave way in reaction and a large pop in the EUR/GBP highlights the currency’s relative weakness. Meanwhile, uncertainty continues to surround the EU amid worry about other countries and their deteriorating fiscal situations. America’s unemployment claims continue to hover at uncomfortably lofty levels and today’s EU PMI data set printed mixed. Hence, the economic recovery appears to be cooling around the globe, leading investors to the Dollar for safety. The Cable has been caught in the headwinds of the onslaught over the past 24 hours, likely because the Pound was holding up relatively well before. The UK will kick off next week with Nationwide HPI data and attention will be focused on the inflation report hearings. Although King has reiterated that this month’s sharp rise in prices was merely a blip, investors will be paying close attention to see whether the BoE shifts its stance at all.
Technically speaking, the Cable has multiple downtrend lines serving as technical barriers along with intraday highs and the highly psychological 1.55 level should it be reached. As for the downside, the Cable has multiple uptrend lines serving as technical cushions (off screen) along with intraday lows.
Present Price: 1.5393
Resistances: 1.5414, 1.5444, 1.5470, 1.5520, 1.5541, 1.5585
Supports: 1.5360, 1.5317, 1.5290, 1.5263, 1.5226, 1.5195
Psychological: February lows, 1.55, 1.53

USD/JPY Rallies on Fed News

The USD/JPY popped higher amid a broad-based Dollar rally in reaction to the Fed’s surprise decision to raise the rate at the discount window by 25 basis points. The Fed’s announcement signals that the emergency window may be shutting. Though a small movement, investors are taking it as the first step in the process of soaking up loose liquidity. Such mentality has led investors to buy up the USD/JPY since the BoJ remains concerned about deflationary pressures in Japan. Hence, it is becoming apparent that the Fed may tighten before the BoJ, making the Dollar a solid buy over the Yen. However, although U.S. manufacturing is picking up, unemployment is still a big problem and today’s data shows that this week’s rise in PPI didn’t translate into higher consumer prices. Hence, the Fed is likely to bring along its exit strategy slowly, tempering excitement in the USD/JPY. Japan will kick off next week with the release of the BoJ’s monetary policy minutes. Investors will be digging into the central bank’s outlook on Japan’s economy and inflation. However, the ball will likely remain in America’s court with consumer confidence data due Monday while investors remain concerned about debt issues in the EU.
Technically speaking, the USD/JPY has multiple downtrend lines serving as technical barriers along with intraday highs. Our 3rd tier downtrend line serves as a key barrier since it runs through January highs. Hence, an eclipse of our 3rd tier could signal a continuation in the rally towards the 93 area. As for the downside, the USD/JPY has multiple uptrend lines serving as technical cushions along with intraday lows. Furthermore, the highly psychological 90 level becomes a technical cushion should it be retested.

Present Price: 91.76
Resistances: 91.81, 91.89, 92.03, 92.15, 91.25, 92.35
Supports: 91.66, 91.54, 91.41, 91.31, 91.22, 91.12
Psychological: 90, February highs

Gold Holds Above $1100/oz Despite Dollar Rally

Gold managed to hold above Thursday’s lows and the highly psychological $1100/oz level despite broad-based strength in the Dollar in reaction to the Fed’s surprise decision to raise the discount rate. The Fed’s decision shocked FX markets after the bell, sending investors rushing towards the Dollar after interpreting the Fed’s announcement as a signal that the exit strategy from loose liquidity has begun. Although gold did experience sizable down-bars on the 4-hour, the pullback wasn’t nearly as intense as what occurred in the EUR/USD. Hence, stability in gold could signal an overreaction in the major Dollar pairs. However, should the risk trade continue its freefall gold may be inclined to follow suit due to its usual negative correlation with the Greenback. Regardless, resilience in gold the past 24-48 hours has been interesting and should be watched by investors. Meanwhile, volatility in the FX markets could remain volatile over the near-term considering the extent of this week’s pullback. Trading ranges could be wide until the Dollar settles and a new normal is established. However, it remains to be seen whether this will translate into gold’s activity.
Technically speaking, gold faces multiple downtrend lines along with 2/18 and 2/17 highs. As for the downside, gold has multiple uptrend lines serving as technical cushions along with 2/18 lows and the highly psychological $1100/oz level should it be tested.

Present Price: $1114.30/oz
Resistances: $1115.98/oz, $1117.72/oz, $1119.70/ oz, $1121.19/oz, $1123.67/oz, $1126.15/oz
Supports: $1114.24/oz, $1112.01/oz, $1110.03/oz, $1108.29/oz, $1106.56/oz, $1103.33/oz
Psychological: $1100/oz, $1125/oz, February highs and lows

AUD/USD Bounces Off .89

The AUD/USD has recovered from yesterday’s pullback by bouncing off our 2nd tier uptrend line and the psychological .89 level. The Dollar experienced another large broad-based rally as investors remained concerned about EU debt. Furthermore, the Fed shocked markets after hours by announcing it is raising the discount rate by 25 basis points. Hence, the Fed is sending a message that the emergency window is shutting and possibly serves as the first move for the central bank’s exit strategy. Investors bought up the Dollar in reaction and the Aussie participated, though to a lesser extent. The AUD/USD remains the strongest out of most major Dollar pairs since the RBA has the tightest monetary stance among developed nations. The possibility of another rate hike from the RBA should economic fundamentals improve has created a relative strength for the Aussie as uncertainty increases in the EU and UK. However, should conditions in the EU, UK and U.S. deteriorate while China tightens the RBA may be discouraged again from tightening itself. Therefore, investors should keep an eye on global econ data as it rolls in. Speaking of which, although Australia will be relatively quiet on the data wire next week, investors will continue to receive key data points from the U.S. and Europe.
Technically speaking, the Aussie has multiple uptrend lines serving as technical cushions along with intraday 2/15, and 2/12 lows. As for the topside, the Aussie has multiple downtrend line serving as technical barriers along with the highly psychological .90 level. Furthermore, 1/28 and 2/17 highs could serve as technical obstacles should they be reached.

Price: .8935
Resistances: .8949, .8964, .8984, .9005, .9026, .9045
Supports: .8917, .8903, .8884, .8859, .8842, .8823
Psychological: .90, .89

S&P Futures Hover Around 1100

The S&P futures are hovering around their highly psychological 1100 level as investors digest the Fed’s decision to raise the rate at the discount window by 25 basis points. The Fed’s announcement shocked investors after the bell, sending the Dollar on another leg higher. However, markets have settled with the Dollar coming off of its intraday highs. By raising the discount rate by 25 basis points the Fed is signaling that the emergency window may be closing. This appears to be the first step in the Fed’s exit strategy, and investors have reacted accordingly by buying the Dollar and selling equities in anticipation of more expensive credit. The question becomes how long the exit strategy will take since a rise at the discount window doesn’t necessary imply the Fed will raise the benchmark rate any time soon. Meanwhile, investors should keep a sharp eye on equities as the week comes to a close to monitor how equities take the news. That being said, markets will have the weekend to calm and this could help limit the impact from the Fed’s rate hike. The S&P futures have held up well this week considering the run the Dollar has had. The Cable and EUR/USD took a big hit yesterday even before the Fed’s announcement. However, the S&P futures managed to knock out a solid gain, an encouraging performance since equities have been negatively correlated with the Greenback. Regardless, investors should continue to track movements in the Dollar for further strength could drag the S&P futures lower. Data wise, Unemployment Claims rose to 473k this week, showing that unemployment continues to be a sore thumb in the economic recovery. However, manufacturing is improving and produce prices climbing. Today’s CPI disappointed b y3 basis points and the rise in producer prices hasn’t translated to stronger consumer prices, likely a result of low consumption. That being said, the U.S. will be releasing CB Consumer Confidence data on Monday and it will be interesting to see whether confidence has improved or not.
Technically speaking, the S&P futures have multiple downtrend lines serving as technical barriers along with 2/18 and 1/21 highs. As for the downside, the S&P futures have technical support in the form of 2/18, 2/13, and 2/15 lows. Meanwhile, the psychological 1100 area could continue to play a key role.

Price: 1100.25
Resistances: 1101.5, 1103.5, 1106.75, 1109.75, 1112.25
Supports: 1097.25, 1094.5, 1092.5, 1090.25, 1087.75
Psychological: 1100

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