FBS monthly report: July prospects
In June US Fed Governor Ben Bernanke surprised the financial markets by saying that the regulator may start tapering QE3 later this year in case if the economy and employment grow in line with expectations. Investors' suspiсions had finally been confirmed, but the uncertainty persists: in July traders will continue closely watching the US figures as they will be the key drivers for the major currency pairs.
As you can see from the table below, in June the US dollar weakened versus the euro, pound, Japanese yen and Swiss franc, while Australian and New Zealand dollars remained under pressure. According to the latest CFTC report, the value of USD net long positions kept on falling, having declined from $14.6 bln on June 18 to $13.3 bln on June 25.
EUR/USD: long-awaited reversal
In early June EUR/USD extended its May rally. ECB meeting on June 6 gave some confidence to the euro bulls: policy remained unchanged, and Mario Draghi noted the general improvement of the macroeconomic background over the recent months. June euro zone’s statistics had also been promising. Mr. Draghi, however, keeps talking about the downside risks in the economy and underlining that the policy will remain loose as long as needed.
Investors were trying to guess how high the euro can go. Fed’s Ben Bernanke answered all the questions on June 19 by saying that the US QE3 program can be tapered in the next year. As a result, the pair reversed from $1.3415 (2011-2013 resistance) and entered the downward trend.
At the end of June EUR/USD tested the levels below the $1.3000 mark (around 61.8% Fibonacci), having fallen by 400 pips. Downside revision of the US Q1 GDP on June 26 made the market doubt on the terms of US policy tightening, but the medium-term euro prospects remain clearly bearish.
Clear fix below the $1.3000 support will open the way to our $1.2750 target (200-month MA, March and April lows). Pay attention to the $1.2950 (June minimum) and $1.2800 support. The pair needs to return above $1.3400 in order to resume the uptrend, but in current conditions it looks very unlikely.
Chart. Weekly EUR/USD
GBP/USD: rally is over
The June dynamics of GBP/USD has a lot in common with the dynamics of EUR/USD. At the beginning of the month cable extended its May rally, testing $1.5750 on June 17 (61.8% Fibo from the 2012-2013 decline). However, the Fed’s June 19 meeting had also impacted the pound, reversing it to the downside. Bank of England also met on June 19: despite the Mervin King’s calls for easing, policy remained unchanged.
As a result, cable dropped by more than 500 pips, testing the levels below $1.5200. On the week of June 16-22 the pair formed a strong “bearish engulfing” candle, and the next week closed with a bearish gap. On a monthly chart one may see a small candle with a long upper shadow, reflecting the buyers’ uncertainty.
Great Britain keeps publishing upbeat statistics, but the combination of expectations of the US QE tapering and the policy easing by the coming BoE Governor Marc Carney are speaking in favor of sales. British financial stability report, released in the end of June, shows that UK financial situation remains unstable because of a sluggish global recovery and euro zone’s problems.
We remain bearish on the pair. A clear fix below $1.5200 (23.6% Fibo) opens the way to $1.5000 and even lower. The next bearish target lies at $1.4830. We will consider all rebounds as corrective as long as the $1.5600 resistance holds.
Chart. Weekly GPB/USD
USD/JPY: down and up
USD/JPY has finished June on the downside. However, it’s worth pointing out that after testing 93.78 on June 13 by the end of the month the greenback managed to rebound and return to the levels above 100-month MA in the 98.00 area. The next obstacle for the bulls lies at the 100.00 handle. Only a convincing break above this level will allow the pair to return to May highs in the 103.70 zone. Important support is found at 97.00/96.70, 93.60 (38.2% Fibo of the advance from September to May) and 90.50 (50% Fibo).
At the beginning of the month many experts were starting to voice disappointment with ‘Abenomics’ or, in other words, economic policy of Prime Minister Shinzo Abe. However, the ruling party has managed to strengthen its position and win Tokyo elections. In addition, industrial production and retail sales data came significantly above forecasts, while inflation didn’t decline. We expect continuation of the downtrend, though growth will be much slower than it was before May.
Chart. Weekly USD/JPY
AUD/USD: discouraging prospects
Aussie kept falling in the first summer month. The fall of AUD/USD has slowed in comparison with May and we’ve seen occasional corrections up. At the same time, the pair has settled below the reversal area of $0.9400/9388 where one can find 2009 and 2010 highs and 2011 low, so the prospects of Australian currency remain bearish.
Support lies at $0.9140 (38.2% Fibo of the advance in 2008-2011) and $0.9000. The decline below the latter will bring the pair down to $0.8850 (100-months MA) and $0.8700. At the beginning of July we expect short squeeze as Aussie’s oversold, but the currency will be very vulnerable for selling on the advance to $0.9400/9600.
The Reserve Bank of Australia left its benchmark interest rate on hold at 2.75% on July 2 and kept dovish tone. Aussie’s affected by the slowdown in Chinese manufacturing activity and the decline in commodity prices. The change in the nation’s government also didn’t increase AUD attractiveness.
Chart. Weekly AUD/USD
Prepaired by FBS analysts Elizaveta Belugina and Kira Iukhtenko