Forex Forecast – Sterling

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The pair of sterling / dollar continued its fall against the backdrop of bad data on GDP and reached $ 1.6430, which is 82% correction of growth for the level of $ 1.6327 and early European session highs $ 1.6693.

In the case of a breakthrough at this level ($ 1.6430) pound / dollar may decline further to $ 1.6400 and may continue on to $ 1.6350/40 area (reports by dealers, there are sell orders are on the breakout level of $ 1.6380). Resistance is located at around $ 1.6490/500.

Forex Technical Analysis

Euro / dollar

Bull forecast and the possibility of growth to 1.4800 and 1.4835 remain only if the pair endure above 1.4740. Otherwise a possibility of a deeper correction to 1.4710.

While the pair is held above the uptrend support line, which now runs at 1.4515, it is still rising forecast with the prospect of growth to 1.4865 and 1.5200.

Resistance levels 1.4800, 1.4835
Support levels 1.4740, 1.4710

Dollar / yen

To save the bearish forecast, the pair should not break resistance at 88.75. In this case, the following objectives will be top-down levels of 88.00 and 87.50

Resistance levels 88.75, 89.20
Support levels 88.00, 87.50

Euro / pound

If the pair survives above 0.9175 support level, you can expect a move to 0.9230 and 0.9275, otherwise, not to avoid a deeper correction to 0.9140/35.

To maintain upward dynamics couple must stay above the level of 0.9175.

Following goals: 0.9305 and 0.9385.

If support is breached, may decline to 0.9080.

Resistance levels 0.9230, 0.9275
Domestic support levels 0.9175, 0.9140

Sterling Forex Forecast

Sterling continued to bargain with the bearish mood, and currently is under pressure from a series of orders to buy near $ 1.5880.

Dealers noted that keeping pressure on the sterling has contributed to the rating agency Fitch issuing a report in which it was noted that the recent improvement in the dynamics of property prices in the UK is temporary.

In the Fitch reports then continues to hold the view that housing prices in United Kingdom will fall by 30% from its peak in October 2007 – current prices have only passed about 13%, while in the first quarter of this year, falling to 19%.

Dealers report that interest in buying sterling remains near $ 1.5865/60, but also warned of a possible wave of liquidation of long positions in case of short-term break below, which will endanger the bids around $ 1.5835/30 and $ 1.5810/00

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Forex Forecast – Technical Analysis

EUR / USD (1.4624)

After the fall of the level of 1.4845, this pair tested and pierced channel from 1.3832. Now  the pair has  returned to the area of the inverted channel from the June lows (the top of today’s 1.4716) and tested the level of 1.4611.

Support is at 1.4561 / .4554 (reaction low hour / middle Bollinger band on the daily chart), then in the area of 1.4515 / .4502 (reaction low medium-term time).

1.4438 / .4429 = breakthrough time / long-term moving average on the daily chart.

To maintain the current medium-term trend of the pair must stay above this area. Resistance is at 1.4674 (break time), followed by the levels of 1.4712 / .4721 (top Bollinger band on the weekly timeframe / potential today’s high) and 1.4750 / .4766 (top of the envelope on the daily chart / hour break), where there is a chance of possible consolidation.

In case of further growth next resistance is at 1.4803 (reaction high time), followed by the levels of 1.4845 / .4867 (last week, a maximum of + wave C of 1.2457 / max September 2008) and 1.4899 (top of the envelope on the weekly chart).

This level will be difficult to pass on the first attempt against the danger of overbought and bearish divergence.

USD/JPY (89.44)

Pair reached a new reaction low and tested/  pierced the channel of 97.79 (the same on the daily charts: channel from 97.75 with a broken top at 88.32 – was re-tested today).

The first area of resistance is at 89.65 (today’s high potential), followed by levels of 89.94 / 89.97 (All reaction high), 90.17 (peak envelope on the daily chart) and 90.32 / 90.56 (the top of the envelope on the weekly schedule / short-term moving average on the daily chart) where the possible consolidation.

In case of further growth following the resistance is in the 90.76 / 90.97 (short-term moving average on the weekly chart to medium-term moving average on the daily chart.

This level will be difficult to pass on the first attempt. The first area of support is in the area of 88.32 / 88.23 (potential today at least). This level will be difficult to pass on the first attempt. In case of a further reduction next support is at 88.00 (the base of the envelope on the weekly chart) and 87.10 (at least one year), followed by consolidation.

EUR/GBP (0.9202)

After the reversal of .8705 the pair reached a new high recovery in the breakout above the top of the channel from .8453 and against the background of the Bank of England Governor King’s comments.

Now the pair tries to continue its upward movement above the top Bollinger band on the daily chart (currently at .9229). The first area of support is at .9200 (time reaction low) followed by levels of .9178 (the base of the envelope on the daily chart) and 9135 / .9123 (the base of the envelope at the weekly chart / short-term moving average on the daily chart).

To maintain short-term trend couple must stay above this area. The level of .8984 = medium-term moving average on the daily chart: to maintain the medium-term trend of the couple must remain above this level.

The first area of resistance is at .9247 (time break), then in the area of .9300 (current + potential new maximum recovery of .8400), where the possible consolidation. In case of further growth next resistance is in the area of .9331 / .9342 (top of the envelope on the weekly schedule / potential resistance).

This level will be difficult to pass on the first attempt.

EUR/JPY (130.77)

The pair re-approached the hole in the top of the channel from 138.72 (the same on the daily charts at 129.90).

Resistance is at 131.20 (time break), followed by levels of 131.90 (time reaction high), 132.15 (top of the envelope on the daily chart) and 133.35 / 133.39 (daily breakthrough / peak envelope on the weekly chart), where the possible consolidation.

In case of further growth next resistance is at 133.75 (long-term moving average on the daily chart). This level will be difficult to pass on the first attempt. The first area of support is at 129.90 / .85 (current potential minimum), then in the area of 129.54 / .45 (200-day moving average / base Bollinger band on the weekly chart).

This level will be difficult to pass on the first attempt. In case of further reduction, next support is in the 128.74 / .27 (stop and turn on the weekly schedule / punched a 50-week moving average), followed by consolidation.

Forex Forecast

The sterling came under intense pressure last week falling to 1.10 against the euro and slipping against the USD. The sterling has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph. The paper reported that Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements.

Among the other factors weighing on the sterling; likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves; likelihood of additional Quantitative Easing coming soon; and of course dire public finances. The recent rally in the FTSE will have provided the sterling with some support- the concern is that if equities sell-off the sterling could drop further. We need to see some consolidation over the next few trading sessions to support the sterling.

On top of the bad news surrounding the sterling we have also simultaneously witnessed consistent euro strength against the USD pushing up over 1.47. This has helped to keep the euro strong across the markets and also against the sterling. In an article over the weekend the Telegraph are pointing towards GBP/EUR hitting parity in the first quarter of 2010; whilst this cannot be ruled out we must consider that economic sentiment is very fickle at the moment and the tide can change very quickly. This week the Bank of England minutes will be closely scrutinized to asses on further or imminent QE measures from the Bank of England.

The USD has made a comeback against the EUR, AUD, JPY and GBP over the last trading session. Previous to this USD weakness seemed to be engrained into the markets as various factors converged to heap pressure on the USD. The recent USD strength coming back into play has been attributed to this weeks FOMC interest rate meeting in the US; the expectation is growing that the Fed will discuss exit strategies in the near future and this will signal a hawkish tone with the potential for interest rate rises to follow.

However a recent  fall below 0.8170 has not led to the development of any downward trend movement.

The bank believes that this is a signal to a consolidation phase before the AUD / USD once again tries to head downwards.

Short-term resistance is at the level of 0.8330.

While the AUD / USD is below this level then next support level is 8155/25, if this pair breakthroughs this level then the field will open to level of 0.78.

Currently the pair AUD / USD traded is trading at 0.8241.

Foreign Exchange Market Insight

Financial markets continue to remain in a state of uncertain flux as conflicting indicators and persistently unpredictable macro events sway sentiment. The frothy risk-rally in equities, commodities and risk FX from March has hit a wall of doubt in mid-May leading to a sense of overextension amongst investors as well as speculators. The sudden boost in confidence was born in the financial sector on the back of returning profitability amongst financials, helped primarily by record levels of stimulus worldwide.

Since May however, range-bound consolidation has occurred in conjunction with increasing variance in macro data flow – several monthly economic indicators have fluctuated spectacularly; suggesting a burgeoning recovery one month, only to shock market participants with a reversal the next. The exact reasons behind this variance are arguable, although it is highly likely that the widespread uncertainty prevalent amongst governments, businesses and individuals has led to a failure in attaining a broad ‘consensus of confidence’ – whether it be spending decisions on an individual level, investment preferences within businesses or policy frameworks amongst policymakers.

It is also likely that the shock value of the financial crisis created a sense of disbelief that a strong recovery could take place. The psychological effect resulting from the crisis is likely to be as important as the financial because although the tangible impact has been that of falling asset prices and higher unemployment, the psychological impact is only now coming into effect. As if the global economy had suffered a concussion, market participants are struggling for clarity and reluctant to take risks while waiting for a recovery. The risk-rally from March lows was unable to be sustained in part because of the fear that economic conditions cannot recover that quickly.

All sections of G20 economies have felt the effect of this dragging effect. Consumers who continue to have stable incomes are choosing to cut spending and/or borrowing; house prices remain under pressure as both buyers and sellers refrain from entering the market, waiting for prices to stabilise. Businesses are doing the same – cutting investment, inventories and staff as a way to survive until economic conditions improve. Paradoxically, a collective biding for better conditions is preventing those conditions from occurring – this is due to the psychological effect of unprecedented asset price falls as well as incessant media coverage that focused on worst case scenarios. The priority is clearly to save for the benefit of yourself rather than spend for the benefit of aggregate demand which although understandable is also worrying for quick recovery theorists. The same scenario occurred in Japan in the 1990’s where saving rates rose so high that deflationary effects persisted for a decade.

Asset prices have reflected macro uncertainty via range bound trade since May; equities, commodities and FX have all been unable to break higher because of ongoing insecurity about how valid the recovery is. The ongoing Q2 earnings season in the US has threatened to change this because where Q1 performance was primarily about financials, investors are hoping for a broad improvement in performance across all sectors in Q2 as confirmation that a return to normality could occur in the near future. Since firms have started to report in early July, US, UK and European equities have rallied close to 10%. Investors and consumers alike are probably going to continue questioning any rapid recovery story, the only difference now is that indications of expansion rather than slowing contraction stand to drive confidence higher.

Forex Forecast for week ending 24th July

 Looking forward, another bumper week for data includes monetary policy minutes from Japan, Australia and UK which will provide insights into the thinking behind recent monetary policy decisions, including QE developments.

 The week builds to a crescendo on Friday where initial GDP estimates for the UK and initial PMI numbers for the Euro zone stand likely to clarify some of the ambiguity surrounding the much touted V-shaped recovery and thus drive asset prices.

 Active speculation before next Friday’s announcements is almost certain in these most uncertain times as mixed signals continue to entrench recent consolidation. On a broad basis, financial markets have recovered almost all of the recent retracements from yearly highs – indicating a potential re-test of those same highs. It is noteworthy that it took over 1 month to force green-shootists back to their hideouts via a 5%-10% sell off in equities and commodities whereas the resumption of recovery aspirations only took 1 week leaving several indices within striking distance of fresh 2009 highs.

Market participants are seemingly more open to good news rather than bad news. In our view this is mainly because investors are inclined to overshoot when responding to fundamental surprises. A decent dose of good news can erase several weeks of uncertainty and anxiety and vice versa which suggests that the likelihood of sharp turnarounds is higher and that investors are still perplexed and unsure as to how the recovery will actually look like.

The Q2 earnings season continues as the financial sector has driven economic sentiment higher. This week’s earnings from other sectors will be seen as a potential factor to add strength to the recovery story. Earnings season still has many more firms still left to report with the potential of more USD losses and further equity gains because the spotlight is about to move over to non-financials.

 Many investors were surprised by the positive reaction in equities last week on the back of banking results because it was very likely that record low borrowing rates mixed with stubbornly high lending rates would create a lush operating environment for banks. If non-financials also exceed expectations this could symbolise a valid, broad recovery – something that the recovery theorists need in abundance in order to justify the sharp bounced across most asset classes since March.

 A possible theme this week could be the swine flu effect upon UK GDP. Although a concrete effect cannot be gauged until subsequent GDP estimates for Q3 and Q4, a speculative effect could nevertheless affect UK share prices and Sterling due to heightened media coverage and investor over-sensitivity to fundamental developments. Some estimates predict the net effect on UK GDP being as high as 4% which if proven true would be immensely damaging to the UK economy and Sterling.

 Apart from the mini-panic in April, no widespread tangible effect has occurred as a consequence of swine flu because infection rates have not risen as sharply as feared. This could change quite rapidly leading to large numbers of people staying away from work thus affecting economic activity in several industries. This could also affect other countries, and not just the UK. As a theme, we do not expect any substantial developments in the near future but it remains a peripheral risk.