The prospect and reality of central bank intervention is likely to continue to weigh on the market this week from all corners of the globe. Last Friday the yen hit its highest level against the US dollar since the Second World War prompting further speculation of imminent intervention by the Bank of Japan this week and this is likely to weigh on moves on this currency pair.
In Europe speculation of further intervention by the Swiss National Bank is also likely to keep moves in the Swiss franc fairly volatile, with some talk out of Switzerland that the Swiss cabinet expects the SNB to set a target rate of around 1.20 francs per euro, though quite how they expect that to be achieved is not entirely clear.
The European Central Bank will in all likelihood continue to buy Italian and Spanish bonds in an attempt to keep a lid on borrowing costs for these countries.
Continued mixed messages from European leaders don’t help market sentiment either with comments by Olli Rehn on Friday that the EU may look at drafting legislation for a euro bond.
This was once again dismissed by German Chancellor Angela Merkel at the weekend when she stated that she won’t let financial markets dictate policy.
She went on to say that euro bonds would require European Union treaty changes that would “take years” and would probably be illegal under Germany’s constitution.
As this week goes on speculation is expected to intensify about what steps, if any, the Federal Reserve could announce, at Jackson Hole on Friday, as the US economy continues to be hit by further growth downgrades from various investment banks for the remainder of the year as well as 2012.
Some in the markets could well be hoping for further measures from Bernanke to stimulate the US economy, though with inflation rising and last week’s shocking fall in Philadelphia Fed activity, the odds of QE3 are starting to look very slim indeed.
There is also growing political opposition within the US which could well make Bernanke’s job a lot harder in that respect, not to mention opposition within the FOMC.
Gold prices continue to hit record highs against the US dollar as investors continue to speculate about this weeks meeting at Jackson Hole and events in Europe, while Brent crude prices have slipped sharply on the back of ongoing events in Libya.
EURUSD – the single currency continues to find itself capped just above the 1.4500 area and last week’s highs.
The major support lies around the 1.4030 area where the 200 week moving average sits. There is also major resistance remaining between July’s peaks between 1.4535 and 1.4575/80. To open up a move towards the 1.4030 area the euro needs to push back and close below the 55 day MA at 1.4330, which has acted as support for the last four days.
There is also minor trend line support from the 1.3835 lows currently around the 1.4185 level.
GBPUSD – despite a new 3 month high at 1.6620 last week the pound slid back but has so far managed to hold above the 1.6400 level. The hanging man we saw on Thursday turned out to be a bit of a noose for cable bears; however the air does appear a little thin above 1.6600. These highs continue to be a key level, with the bigger resistance at 1.6745, the April highs.
Only a break below 1.6420 would target a deeper correction towards 1.6350, or even the 1.6250/60 area which has acted as solid support for the best part of a fortnight now.
Back below 1.6220 retargets 1.6170 while the 200 day MA remains the key support at 1.6085/95, and a sustained break below could well target further losses.
EURGBP – the single currency continues to find support above the 200 day MA around the 0.8660/70 area and this provoked a sharp rebound on Friday. This rebound could extend towards the 0.8800 area and the 55 day MA at 0.8835. It needs a daily close above this level to target higher levels, and a move towards 0.8900.
A close below the 200 day MA has the potential to retarget the May lows at 0.8610 and ultimately the trend line support at 0.8545 from the 2010 lows at 0.8065.
USDJPY – Friday’s fall below the 76.20/30 area, making a new all time low seemed to clear out a load of stops below this key support. The failure to follow through with any conviction saw the market close back above the 76.00 level, as nervousness about possible intervention remained the prevailing sentiment.
The risk remains for further losses, but the market needs to take out the base that appears to be building up around the major lows around the 76.25/30 area.
Any move below these key lows could well see further US dollar losses towards 74.50.
It really needs to rally beyond the 77.30 area to kick on towards the 55 day MA and bigger resistance level at 79.50/60.