January turned out to be a month dominated by risk aversion as we've seen broad based selloff in yen crosses. Euro was hardest hit on concern in Greece's fiscal heath, with EUR/JPY down -6.45%. New Zealand dollar was secondly worst performer after disappointment inflation data and was down -6.39% in January. Even the relatively resistance AUD/JPY, which was supported by strong data from Australia, was down -4.61%. A couple of factors, including sovereign rating concerns in some countries in Eurozone, more tightening measures from China and US Obama's bank plans would continue to weigh on market sentiments going forward.
We'd like to point out the bearish January reversal in US stocks. DOW edged higher to 10729 earlier in the month but then dropped sharply to close at 10067, which is way below December's low of 10235. That is a very clear sign of topping and we'd probably start to see more position unwinding in the rest of Q1. Dollar's reaction to US data will be tricky and we should look through the initial reactions but focus on intermarket relations to determine the underlying force. Just like Friday's Q4 GDP which showed a strong rise of 5.7% annualized. The ultimate reaction was that DOW was down -0.52% on Friday which in turn lifted dollar and yen.
The January FOMC statement showed slightly more hawkish tone on economic growth though the overall stance remained unchanged - the Fed funds rate will be kept at 0-0.25% and 'economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period'. Kansas City Fed President Thomas Hoenig's dissent to keep the 'extended period' phrase was also surprising and signaled there might more hawks appearing later this year.
Euro continued to be weighed down by concern on Greece and possible contagion effects. In particular, Germany and France denied a report of an imminent EU bailout of Greece and sent Greece CDS up to 414 record 414 level which was the same as Dubai's CDS when it got a $10b bailout in December. The yield on 10-year Greek bonds rose to as high as 7.15 percent , the highest level since October 1999 and up from 4.99 percent on Nov. 30. Euro will likely remain pressured against dollar and yen on this issue. Nevertheless, the decline against Swissy and Sterling look a bit stretched. Indeed, Friday's sharp rebound in EUR/CHF argues that SNB might start to intervene again after EUR/CHF approaches 1.45 level.
Sterling, on the other hand, was somewhat supported by Hawkish comments from BoE Sentance. It's likely that BoE will pause the quantitative easing program this week. However, the path ahead is still very unclear considering that recovery in UK is still very weak. We're talking about a mere 0.1% qoq expansion in Q4 in UK's GDP which suggests that there are still much risk s of returning into recession. It should be just a matter of time when Sterling catches up with weakness of other European currencies.
Looking at the charts, as mentioned before DOW's single month reversal in January is definitely a sign of topping after it fails to sustain above 55 months EMA. It's still a bit early to conclude whether whole medium term rise from 6496 has completed, but near term weakens in anticipated in any case and further fall should be seen towards 38.2% RETRACEMENT OF 6569.96 TO 10729.89 AT 9102.6.
Another point to note is that CRB commodity index might have topped in 293.75 on bearish divergence condition in daily MACD, after failing 100% projection level of 297. The sharp break of the trend line support should have already set the stage for deeper fall to 213.2 support level going forward.
The above developments is inline with the bullish view on dollar. Dollar index soared to as high as 79.49 last week and is now heading to mentioned initial medium term target of 38.2% retracement of 89.62 to 74.19 at 80.08. As noted before, our preferred view is that price actions from 88.46 are a three wave consolidation to longer term rise from 70.70. That is rise from 74.19 is tentatively treated as resumption of the longer term up trend. Having said that 100% projection of 74.19 to 78.45 from 7.60 at 80.86 will be a key level to look at. Firm break there will increase the odds that rise from 74.19 is developing into an impulsive move, which further affirm out preferred more bullish view.
The Week Ahead
It's a very busy week ahead with three central bank meeting plus a number of heavy weight economic data. Markets are expecting another 25bps hike from RBA this week. But there are speculations that RBA would opt to pause after this rate hike and some selloff in Aussie might be seen if RBA really does so. BoE will leave rates unchanged and will likely pause it's quantitative easing program. ECB meeting could be a non-event as the bank keeps rates and stance uncharged.
- Monday: Swiss SVME PMI; Eurozone Final manufacturing PMI; UK Manufacturing PMI; US Personal income and spending, ISM manufacturing
- Tuesday: RBA rate decision; Eurozone PPI
- Wednesday: Eurozone Final services PMI, retail sales; UK Services PMI; US ADP employment, ISM non-manufacturing; New Zealand job report
- Thursday: Australia retail sales; BoE rate decision; ECB rate decision; US non-farm productivity, factory orders; Canada Ivey PMI
- Friday: UK PPI; Canada job report; US non-farm payroll
EUR/USD Weekly Outlook
EURUSD's decline extended further as expected and reached as low as 1.3861 last week. Initial bias remains on the downside this week and further fall should be seen to next key cluster support at 1.3737. On the upside, above 1.3989 minor resistance will turn intraday bias neutral and bring consolidations. But recovery is expected to be limited by 1.4193 resistance and bring fall resumption.
In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, however, break of 1.4578 resistance will leave the fall from 1.5143 in three wave corrective structure and mixes up the outlook.
In the long term picture, the lack of impulsive structure of the rise from 1.2329 argues that it's the second wave of the wide range correction that started from 1.6039. Another medium term decline should still be seen to 1.2329 and below. Break of 1.1639 support is possible based on 100% projection of 1.6039 to 1.2329 from 1.5143. But downside will likely be contained by 61.8% retracement of 0.8223 to 1.6039). After all, the long term up trend from 0.8223 is set to resume after completing the three wave medium term correction from 1.6039.
img class=hand onload=resizeImg(this,450) src=http://www.actionforex.com/images/stories/contributors/actionforex/eurusd20100131w1.gif border=0 alt=EUR/USD 4 Hours Chart - Forex Education, Forex Course, Forex Tutorial, Forex eBooks, Forex Training />