Daily Forex Market Analysis with Forecasts and How To

EURUSD & GBPUSD Overview, Volume Is Picking Up After NYE

By Razvan Mihai

We came back from the holidays full of energy for the year ahead, first of all we wish you a wonderful new 2014, full of success and good trades. Same like us, investors are also coming back from their holidays and this can be seen in the rising volume and the lower volatility from the Foreign exchange market.

Around NYE, it seems that the low volume made possible for the FX instruments, especially EUR/USD to have some interesting moves:

Let us start with the most traded currency pare, which we mentioned earlier EURUSD. It closed on 2013 under 1.3800 and this meant that bears still have some fighting power left. During the first trading days it dropped all the way to 1.3600 and this week dropped even lower, hitting 1.3572.

Today there were some interesting publications in the economic calendar. The German Prelim CPI was in line with the expectations, 0.4% rise, Spanish Services PMI rose the a 6 year peak, 54.2, Italian Services PMI slightly rose to 47.9 from last month’s 47.2 and the Europe Sentix Investor Confidence rose the most in the past 3 years, hitting 11.9.

The United States reported today the ISM Non-Manufacturing at 53.0, lower with 0.3 points from las month, and the Factory Orders up 1.8%, which was in line with the expectations.

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What Did Really Happen With The Markets?

By Razvan Mihai

Even though yesterday not many expected a tapering of the Quantitative Easing program, it happened. Federal Reserved announced that they will cut the monetary easing program from 85B to 75B. Now everybody says that this decision was semi expected, to say it like that, by the market and that is why the reaction was like it was.

We actually think that the real explanation of the market reaction is that even though the FED cut the QE with 10B dollars, but equilibrated the balance with the fact that they will keep the interest rates as low as possible even after the unemployment rate had touched 6.5%. The main banks are expecting low interest rates until late 2015.

They are going to reduce even more the program but this will happen if the economic data will be accordingly to their forecast. The inflation rate is below FED’s target and they will keep a close look over it during the next period.

All these together have appreciated the US dollar and triggered a drop in Gold’s price, but it also triggered big rallies for the indices.

Today the main economic releases were the Current Account for the Euro Area, which rose at a surprisingly 21.8B; UK’s Retail Sales which grew by 0.3% and the Unemployment Claims from USA which went up to 379K.

Up next the markets are still waiting for the Existing Home Sales, the Philly Fed Manufacturing Index and CB Leading Index.

After all of these, the EURUSD is trading around 1.3670, where it has encountered a powerful trend line. On an intraday interval a break above 1.3700 could trigger a rally targeting 1.3750, but a continuation of a drop under 1.3650 would be a good selling signal targeting 1.3600.

USDJPY jumped to 104.20 from 102.70, after last night decision. The current trend might continue only if the local high will be broken, but we would carefully look also after a corrective move under the 103.75 low. AUDUSD is currently trading around 0.8840 but the pressure seems to be on the downside.

Dow Jones Industrial, on features, rallied above 16000 and continued to 16100. At this point the consolidation is fragile and the up move might continue targeting 16200.

XAUUSD bumped into 1200$ per ounce, but it seems that bears are still trying to break this level. Silver is heading for 19$ per ounce with no local support to stop the fall.

Crude Oil is knocking at 99.00$ per barrel and the bulls power seem to keep growing, so we expect a breakout above this level during the next trading hours. Brent Oil has encountered a good resistance at 110.35$ per barrel but it might not be enough to stop its rally. A break above this level could target 111$ per barrel.

Do you remember our yesterday’s article What are investors expecting from the FOMC meeting? Our option expired today outside the range we mentioned for the EURUSD and we cashed in the full payout.

What are the Investors expecting from the FOMC Meeting?

By Razvan Mihai

Can we consider today to be the beginning of the end of the Quantitative Easing program? Well looking backward to the economic data we could see some reasons for Fed ti start tapering from today, after the FOMC meeting. But even if we were to be sure of a tapering it wouldn’t be enough to know for sure the direction market will take.

The markets are waiting for a good reason to take a certain direction. The expectations for today are for the Fed to:

- Take no action. Fed could not start the QE tapering nor say nothing about a certain date when it will happen. This could trigger high volatility and the market could become bearish on the US dollar.

- Not start tapering, but announce a certain date when they will and turn to a hawkish tone. This could have a higher impact on the market and the dollar could spike.

- Start tapering the QE with less than 10B a month. This action is pretty expected by the market, so it might not have a very big impact, but on short term the US dollar might gain.

- Start tapering heavily with more than 10B. This would be a big surprise and the volatility might get through the sky. The dollar could rally from the first seconds to the end of this week.

These are the market expectations as for now.

17 of the main commercial banks (Citi, BNP, Barclays, Goldman, Nomura, Credit Suisse, DBank, JPM, BOFAML, RBS and Soc Gen are only a bunch of them) have announced their expectations for today’s meeting.

Two of these are expecting a tapering starring from today, six are betting on a January tapering, three of them are going for March and the rest are holding back. So from what we see the higher probability remains somewhere around the middle. There are equal chances for starting the tapering with less than 10B or no taper but some details regarding when it will start.

For the technical point of view we are looking at the most traded currency pair in the Forex market, EURUSD. Its price has consolidated in a symmetrical triangle right under 1.3800 and above the up channel trend line. If we stick to probabilities we would then think that is better to get with the bulls and wait for an upside breakout, followed by a rally above 1.3820 (latest high).

On the other hand the sceptics would say that a surprise could get the dollar back on its feet and 1.3700 support will be broken and a drop wouldn’t be stopped until 1.3600.

We are telling you to play it safe. If you would like to have a higher probability for your trade wait for the FOMC meeting, see where the market is heading and take action. If you would like to take a risk, then take it smart. Our favorite play for this event would be a Long Outside European Option, especially on the FX market.

Set a range of 1.5 or 2x the daily average of the FX (this way you will have a pretty nice risk reward for you option) and an expiry date for tomorrow, this way you will keep your premium as low as possible and get a pretty nice payout. For an example we took a Long Outside E.O. for the EURUSD with the Trigger Price 1 at 1.3820 and the Trigger Price 2 at 1.3680. Outside this range we will have a payout 5 times higher than the Premium we paid. If the price will remain inside the range, our risk is limited to the amount we already paid.

European Wrap Up, ECB is Aware of the Risks

By Razvan Mihai

Today on the European session the economic data was pretty mixed. While France reported both manufacturing and services flash PMIs under estimates, Germany and Italy surprised with Manufacturing PMIs above expectations and Services PMIs under. The European Trade Balance is up to 14.5B euros, but was published lower than expectations.

At the EU Parliament in Brussels, Draghi announced that the ECB is waiting for a slow pace recovery of the economy, reflected also by the low inflation. Still he also said that the EU economy should benefit from rising export demand. The ECB president is well aware of the downside risks of low inflation and confirmed the fact that the Central Bank is ready to act.

United States released today the Revised Nonfarm Productivity, which rose by 3.0 percent, Manufacturing PMI (54.4, lower than estimates), TIC Long term Purchases went up to 35.4B, the Capacity Utilization Rate rose by 79% and the biggest surprise, the Industrial Production which rose with 1.1%, well above the estimates of 0.6%.

EURUSD couldn’t breach 1.3800. After it touched 1.3797 earlier today, the price action defined a pretty nice Shooting Star on the H4 time frame. The signal was already confirmed and the Euro started to drop and touched a local low at 1.3750. It has reacted more volatile after the Industrial Production was published for the United States and stood almost unchanged while Mario Draghi was having his speech. From the technical point of view, there are higher chances for the price to get back to 1.3800 in the next several hours.

The Dow Jones Industrial Average dropped in the first half of December back to 15700 where it found a past resistance that was turned into a support. We are expecting a bounce from here back to 15900, because the price reached a pretty interesting demand zone and the fundamental data sustains a rise in the DJI price.

EURUSD Short Term Technical Perspective

By Razvan Mihai

The worldwide perspective about investing in risky assets seems to have changed. We observed that in December the European single currency has gained 2.0% in favor of the US dollar. It didn’t matter for the investors that good economic data were published for the United States and Fed could use them as an argument to taper the Quantitative Easing program. From this results that we are back to risk aversion and risk appetite.

The United States is the world largest economy. If good economic data is published for the country, investors will think that the world economy will follow. If bad economic data is released for the US then investors will take refuge in American assets because, the world largest economy cannot default.

So how do you think that such logic will influence the EURUSD? If the US economic indicators will be published above expectation then investors would like to put their money in riskier assets, like the EUR, thus this currency will gain. If bad economic data will be released then investors would like to get their money back into a safe heaven, which is the US dollar, so it will go up.

From the technical point of view, on a one month time period, the EURUSD trend is up. The price even broke the rejection of the channel and rallied all the way back to 1.3800. Around this level it has encounter a very important resistance area, which we talked about in our past analysis. It is a very interesting confluence zone which rejected the price back in late October.

At this point would be pretty hard to decide whether it will continue its rally or it will have another bounce. There are some bearish signals given by the overbought RSI (14 periods) but they aren’t enough to take a position, especially because it signals a counter trend move. From our opinion the bearish signal would be confirmed by a drop back under 1.3750 and the target for the drop would be around 1.3650.

A break above 1.3830, the latest high, would signal that the buyers still have the power to move prices even higher and we would look to buy the dips. Between 1.3750 and 1.3830 it is a gray area in which the price might play for a while before deciding its direction.

Keep your eyes also on the economic calendar. Today the sky it is clear, but tomorrow it might get a little bit clouded with the speech of Mario Draghi and the US Core Retail/Retail Sales and Unemployment Claims.

On your Mark, Get Set, GO! Volatility Start

By Razvan Mihai

The race of economic publications will start from the first day of the week. As we know, the beginning of the month will be dedicated to the monetary policy meetings and also to a very important series of macroeconomic releases. These will most likely raise the forex market volatility and that it is why it important to be very attentive.