GBP/USD Outlook March 3-7

GBP/USD reversed directions last week, posting gains of 100 points. The pair closed the week slightly above the 1.66 line. This week’s highlights are the PMI releases. Here is an outlook for the main events moving the pound, and an updated technical analysis for GBP/USD.

US releases continue to sputter, as GDP missed the estimate and Unemployment Claims were higher than expected. In the UK, GDP posted a strong gain and CBI Realized Sales rose sharply.

Updates:

GBP/USD graph with support and resistance lines on it. Click to enlarge: 

1. Manufacturing PMI: Monday, 9:30. This is the first key event of the week. Manufacturing PMI has been steady, with the January release coming in at 56.7 points, slightly beneath the estimate of 57.1. Little change is expected in the upcoming release.
2. Net Lending To Individuals:Monday, 9:30. Analysts are interested in consumer borrowing, since this is closely related to consumer spending, which is a key component of economic growth. The indicator looked good last month, rising to $2.3 billion, well above the estimate of $1.9 billion. The markets are expecting a stronger release in February, with the estimate standing at $2.5 billion.
3. Halifax HPI: Tuesday, 4th-7th. This housing price index is an important gauge of activity in the UK housing sector. The index posted a strong gain of 1.1% last month, rebounding nicely after a decline a month earlier. Another gain is expected in the upcoming release, with an estimate of 0.6%.
4. Construction PMI: Tuesday, 9:30. Construction PMI is looking sharp, as it continues to trade well above the 60-point level, indicating strong expansion in the construction industry. The January release came in at 64.6 points, easily surpassing the estimate of 61.6. Another strong reading is expected in February, with an estimate of 63.6 points.
5. BOE Deputy Governor Jon Cunliffe Speaks: Tuesday, 10:30. Cunliffe will speak before the House of Lords EU Sub-Committee on Economic and Financial Affairs in London. Remarks which are more hawkish than expected are bullish for the pound.
6. BRC Shop Price Index: Wednesday, 00:01. This minor indicator measures inflation as reported by shops belonging to the BRC chain. The indicator continues to post declines, with the January release dropping to -1.0%.
7. Services PMI: Wednesday, 9:30. Services PMI continues to point to expansion, but the index has now lost ground for three consecutive releases. The January release came in at 58.3 points, short of the estimate of 59.1. The forecast for the upcoming release stands at 58.0 points.
8. Asset Purchase Facility: Thursday, 12:00. The BOE is expected to maintain its QE scheme at 375 billion pounds, where it has been pegged since July 2012. No change is expected in the February release.
9. Official Bank Rate: Thursday, 12:00. The BOE has maintained the benchmark interest rate at 0.50%, where it has stood for almost five years. There is increasing speculation that the Bank may have to raise rates to respond to the strong economy, but no change is expected in the upcoming release.
10. Consumer Inflation Expectations: Friday, 9:30. Consumers continue to expect high inflation, with recent readings coming in above 3%. The previous release posted a gain of 3.6%, well above the levels we are seeing from CPI and other inflation indicators.

* All times are GMT

GBP/USD Technical Analysis

GBP/USD opened the week at 1.6631. The pair quickly touched a low of 1.6583, breaking below support at 1.66 (discussed last week). but then reversed directions and climbed past the 1.67 line, hitting a high of  1.6769. GBP/USD closed the week at 1.6731.

Live chart of GBP/USD:

Technical lines from top to bottom

We start with resistance at 1.7383. This line marked the start of a rally by the pound back in April 2006, which climbed as high as the 2.11 level.

1.7180 has served in a resistance role since October 2008.

1.6990 is next. This line has been protecting the key 1.70 level and has held firm since October 2008.

1.6823 held firm as the pound posted strong gains during the week.

1.6705 was easily breached by the pair this week and has reverted to a support role.  It is a weak line and could face pressure early in the week.

The round number of 1.6600 has some breathing room as the pound trades at higher levels.

1.6475 remains a strong support line. 1.6343 is the next support level.

1.6247 is the final support line for now. It was a key resistance line in October and November 2012.

I am neutral on GBP/USD.

The pound enjoyed excellent gains last week, but can it continue the rally? Much will depend on the PMI releases this week. The US has run into some turbulence but market sentiment remains positive over the US economy and the Fed is likely to trim QE again in March.

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EUR/USD Forecast March 3-7

EUR/USD had an excellent week, breaking the double top and reaching a 2 month high. Is this the beginning of a big rally or just a short lived move? Manufacturing and Services PMI’s, German Industrial Production and the all important rate decision are the highlights of this week. Here is an outlook on the major events and an updated technical analysis for EUR/USD, now on higher ground.

Euro-zone inflation did not fall and remained at 0.8%, while core inflation even went up. This key event for the ECB decision had a huge impact on the euro which rallied strongly. It wasn’t all good for the euro earlier in the week, as soft German inflation and the deterioration int he Ukraine and China hurt it, despite solid German business sentiment. In the US, the picture has improved after terrible data, especially with a jump in new home sales and an OK GDP release. And now, it’s time for the Draghi show. Let’s start:

Updates:

• Mar 3, 8:53: Currency wars could return as deflation threats loom: The spectre of deflation is making the rounds again and could become a major driver of forex activity and even...
• Mar 3, 8:31: EURUSD: Builds Pressure On The 1.3893 Level: Our outlook on EUR/USD remains higher following a sharp rally the past week. As long as it can trade and...

EUR/USD daily graph with support and resistance lines on it. Click to enlarge:

1. Manufacturing PMIs: Monday. Manufacturing sector in the Eurozone has finally returned to growth for the first time in more than four years, lifting hopes for a brighter future. The index edged up to 54 in January from 52.7 in December, rising above the preliminary estimate of 53.9. All the readings surpassed the flash estimates released two weeks earlier indicating a positive growth trend. Both Italy and Spain showed robust growth in output and in new orders. Spain soared to 52.2 from 50.8 in December and Italy maintained a positive reading of 53.1 a bit lower than the 53.3 released in December but still showing improvement.
2. Mario Draghi speaks: Monday, 14:00. ECB President Mario Draghi is scheduled to speak at the European Parliament in Brussels. Draghi may talk about the ongoing growth trend in the Eurozone but may also give clues on the possibility of further rate cuts in the ECB’s next monetary policy meeting in light of slow inflation. Market volatility is expected. It will be interesting to hear how he sees the surprising rise in inflation. Here is one possible explanation
3. Spanish Unemployment Change: Tuesday, 8:00. The number of Spanish unemployed increased unexpectedly in January, rising by 113,000 following a decline of 107,600 on December. However, this was the smallest increase for January since 2007, according to the report, indicating a gradual improvement  and stabilization of the labor market.
4. PPI: Tuesday, 10:00. Euro zone producer prices advanced in December for the first time in three months, rising 0.2% after a 0.1% fall in November. However this small gain did not ease fears of a possible deflation trend which could threaten the fragile recovery in Europe. Producer prices increased 0.2% from November, but were 0.8% lower than in December 2012. Prices edged down in October and November, by 0.5% and 0.1%, respectively. In case low inflation continues it will make it difficult for the euro zone to reduce its large debts.
5. Services PMIs: Wednesday. The services sector for the Euro-area expanded in January, advancing for six consecutive months. Eurozone’s final Purchasing Managers’ Index showed an expansion of 51.6 points in January, slightly better than the 51 release in the previous month but a bit lower than the 51.9 projected by analysts and the flash estimate released earlier. Nevertheless, the last figures indicate an ongoing improvement and a good start to the year. Services sector in Italy continued to improve to 49.4 from 17.9, nearly touching the 50 point line but still in contraction, while services in Spain climbed in January to 54.9 from 54.2 in December remained in the expansion territory for the third month in a row.
6. Retail PMI: Thursday, 9:10. Eurozone retail PMI in January rose for the first time in five months, reaching 50.5 after posting 47.7 points in the previous month. However, Germany was the key factor of this expansion, posting solid improvement in trade since August. France disappointed with a fall in sales showing a slower pace than in December, whereas Italy saw another solid decrease. Another good sign was an easing in layoffs but buying levels kept falling slightly faster.
7. German Factory Orders: Thursday, 11:00. German factory orders unexpectedly fell by 0.5% in December on weaker domestic demand. German companies were hesitant to invest while their neighbors were struggling to recover. The reading was preceded by a 2.4% rise in November. However if the Eurozone succeed to improve, German economy is expected to boost its growth in 2014.
8. Rate decision: Thursday, 12:45, press conference at 13:30. There is a now a low chance that the ECB will lower the lending rate to 0.10-0.15% and set a negative deposit rate of 0.10%. While there is a danger that low inflation might move from the short term to the medium term, and that the ECB could act according to its mandate, as it did in November, the small rise in core inflation gives breathing space to Mario Draghi and company. The high exchange rate of the euro in recent months weighs on exports and lowers prices. With the high exchange rate of the euro, the growing pressure from the IMF and others and the exhaustion of the talk about of negative rates without action, the ECB could have better chances to act.. A negative rate would send the euro tumbling down, while no action would send the euro a bit higher. However, Draghi is more lightly to try to talk the currency down or allow the non-sterilization of bonds in the SMP program before going into the uncharted territory of negative rates.
9. German Industrial Production: Friday, 11:00. German industrial output declined unexpectedly in December, dropping 0.6% from November indicating Europe’s locomotive is affected by the weakness of its neighbors. Industrial production in November picked up by 2.4%. German economy is expected to expand strongly this year but, turmoil in emerging markets and a fragile recovery in rest of the 18-nation euro area, could weigh on growth. Nevertheless, economists are optimistic regarding future growth due to recent improvements in the Eurozone.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with perfect range trading between the 1.37 and the 1.3773 lines (mentioned last week). After dipping to 1.3650, the pair recaptured 1.37 and then jumped all the way to 1.3823 before ticking lower.

Technical lines from top to bottom:

We begin from higher ground this time. The all important round number of 1.40 is of high political importance. Below, 1.3940 served as resistance back in 2011.

The 2013 high of 1.3895 is the top line looming above. 1.3830 was a more serious peak that was seen with better volume and was challenged afterwards in 2013.

1.3773 was a cap in February and beforehand in December 2013 and now switches to strong support. The round number of 1.37, is another support line after capping the pair in December.

1.3650 provided support in December and worked as resistance in September 2013, and is also a significant line. Also the February rally fell short of this line. Below, 1.3560 worked as good support twice during February 2014.

The January 2014 low of 1.3515 provides minor support on the way down. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the downside.

The round number of 1.34 worked as resistance several times in 2013, and is strengthening now. 1.3320 worked as a double top in early September and it was crossed only with a Sunday gap. It remains a clear separator of ranges.

Steep uptrend support lost and recaptured

Since early February, EUR/USD is riding on a sharp uptrend support line (thick black on the chart). It lost it temporarily only to recapture the line shortly afterwards. The steep line is hard to follow.

I am bearish on EUR/USD

After the EUR/USD rally, it is not easy to be bearish. The surprising inflation numbers from the euro-zone (which contradict German data) triggered a strong euro-rally, and this certainly changes the prospects for the rate decision. Nevertheless, the inflation level is still low and the exchange rate is uncomfortable for both export growth and for import related inflation. Draghi may certainly try to play down the currency.

In the US, it seems that the bleeding of terrible data has stopped and has stabilized: GDP was OK and so were new home sales and durable goods orders. The message from the Fed is clear: a lot is needed to derail the taper train. Even a mediocre NFP would be dollar positive, as it affirms more QE tapering in Yellen’s first decision.

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USD/JPY Forecast March 3-7

The Japanese yen enjoyed worries about Ukraine and unimpressive US data to slide. A wide variety of indicators is due to impact the yen. Here is an outlook on the major market-movers and an updated technical analysis for USD/JPY.

Japan recorded another win over deflation, with improvements in all inflation figures. However, the road is still long, especially given the upcoming tax hike. US indicators were mixed, with strong durable goods orders and new home sales, while jobless claims rose. This weighed on USD/JPY that struggled with the strong 102.70 line and eventually fell to lower ground.The downwards US GDP revision, even though there were caveats, didn’t help either. Also the events in the Ukraine, which is torn between east and west, triggers safe haven flows towards the Japanese yen.

Updates:

USD/JPY graph with support and resistance lines on it. Click to enlarge:

1. BSI Manufacturing Index: Sunday, 23:50. Early in the week, we get two important indicators. This survey of large companies in the manufacturing sector has been positive in the past three quarters, indicating optimism. The official data is expected to tick up from 9.7 seen in Q4 2013 to a double digit figure in Q1 2014.
2. Capital Spending: Sunday, 23:50. The level of capital spending grew by 1.5% in Q3 2013. A somewhat slower growth rate is expected for Q4 2013, especially after the weak GDP value.
3. Monetary Base: Monday, 23:50. Since the Bank of Japan announced its grand plan in April 2013, the monetary base seen large year on year growth rates. After a growth rate of 51.9% in February, an even higher growth rate is expected now, given the stronger conviction of the BOJ to act to curb the effect of the sales tax hike.
4. Average Cash Earnings: Tuesday, 1:30. The Japanese government would like to see higher wages in Japan, and thus a higher pace of inflation and a stronger economy. After a rise of only 0.5% in December, a stronger rise is expected for January.
5. BOJ Monthly Report: Friday, 5:00. The Bank of Japan releases the documents it uses for its monetary policy decisions. The recent report showed optimism, and this one is expected to continue the same line.
6. Leading Indicators: Friday, 5:00. This is also an official government figure, that combines no less than 11 indicators. Steady rises have been seen in this compound figure, reaching a peak of 112.1% for the month of December. A small drop could be seen for January.

* All times are GMT.

USD/JPY Technical Analysis

Dollar/yen began the week trading in a perfect range (mentioned last week) of 102.74 to 102, testing both ends and remaining in range. It eventually fell to lower ground reaching a low of 101.55 before slightly recovering.

Technical lines from top to bottom

The top line is the peak seen in the turn of the year: 105.44. This was challenged several times. Below, 104.80 capped the pair during January.

Below, 103.77 provided support for the pair in January and served as a clear separator of ranges. 102.74 was a stubborn peak during February and is the top line of the current trading range.

102 is a round number that provided support to the pair in late January and is now a pivotal line in the range.

101.35 replaces the previous peak of 101.44 after working as support in February. 100.75 was a cushion for the pair during several days earlier in the year and is the last defense before the very round number.

100 is the ultimate support line and the last line for now.

I turn neutral on USD/JPY

While the long direction of the pair remains to the upside due to tightening intentions of the Fed, (andthe downwards GDP revision does not change this) and easing intentions of the BOJ, two global issues are pushing safe haven flows towards the yen: the volatile situation in the Ukraine and the worries about the Chinese economic strength, which are reflected in a process of a weakening of the yuan. So, the long term rise is balanced by short term headwinds.

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