TIME TO SELL EUR/USD

"EUR/USD has been under pressure since the Fed’s tapering announcement on Wednesday and some
stronger sell signals have emerged that suggest the trend lower could extend.
  Fundamentally, we remain bearish on EUR/USD, and with only a handful of trading days left in 2013,
seasonal funding issues that have helped support the pair through November/December should be fading.
 Short term rate spreads, option market pricing, and the technical picture are all pointing lower, which means we may not see a better selling opportunity ahead of the New Year.

EUR/USD has seen some heavy trading in the aftermath of Wednesday’s Fed tapering announcement, and from a number of perspectives signals are flashing lower. Fundamentally, we have been bearish on EUR/USD for quite some time now, and the earlier start to Fed tapering only adds to that view. In the coming year, an ECB with flat or lower policy rates and that still threatens to add extraordinary stimulus should more clearly contrast a Federal Reserve that is reducing accommodative policies.
Through November and December we noted the seasonal funding issues that have tended to lift the pair into year-end over the past decade. With only a handful of trading days left in the
year though, that influence should be fading, and the high in EUR/USD may have already been set.
From a relative value perspective, a sharp move in short term German-US rate spreads in the USD’s favor suggests spot EUR/USD would be more consistent closer to 1.32 (upper chart to the right). Rate spreads have had a looser connection with spot EUR/USD over the past month or so, but a move of the
magnitude that we have seen since Wednesday is certainly worth noting (~5bps).
The options market also reveals investor concerns on the prospects for the bull trend that has built since November. EUR/USD risk reversals have shown a growing premium for protection against a downside move since Wednesday.
On the charts, the technical picture has also turned more bearish as we highlighted yesterday, which also suggests we have already seen the highs for the year.

Bottom line: We have been waiting for clearer topping signals for the past month in EUR/USD and the developments of the past few days may be as clear as it gets. We look to sell EUR/USD near the current spot rate in the upper 1.36 area, in a position that we think could have considerable downside legs in the weeks and months ahead."

FOMC Minutes at 19:00 GMT and what could be the outcome

Let the Federal Reserve debate end and see what they have to offer through its monetary policy announcement. Market had tried to focus and discuss on all issues related to jobs, growth, price stability, forward guidance, etc. Interestingly inflation, which is off target is the new topic and last hope that is being highlighted/focused by the Doves to come to their rescue, as they are well aware of the price of taper. 

Although I am not sure about the risks, as nothing has hindered the US economic activity. But the last word will come from FED that will matter. Whatever decision FED takes, market is now prepared for move that could be delayed by another 3-months if no announcement is made today. If announced, it is the size that would matter. 

The Maths is simple that if FED goes for taper then the size would initially play key role in moving the market. Though small size may not have sever immediate impact, but it ultimately it will lead to strong USD on believe that finally the move has occurred. No tapering would mean USD thrashing and boon for US Bond, EURO, GBP and Oil too could initially benefit, But Gold will take a big stride and could make $ 100-150 gain by year end. If FED give a future time period for tapering, initially USD may make tiny gain before market will start selling US Dollar and US Bond yield will tighten and Gold will glitter.

Meanwhile, prior to monetary policy announcement it is difficult to determine market direction, but lot will depend on the mood of market and hence, market will tilt accordingly. Ahead of policy announcement, German IFO will be released and some important announcement is due from UK too and ahead of FOMC decision US economic data's will be released.

Financial Market overview 2nd week Dec 2013

After impressive US Non-Farm Payroll data and Unemployment falling to 7 pct, there is certainly strong case to argue that FED should start tapering, as unemployment is only half-percentage away from 6 ½ pct target rate. Recent US economic performance goes in favor of US Central Bank’s bond purchase plan to reduce the amount.

It is evident that the labor participation is up averaging over 185.000 this year, earnings are up, and confidence in the economy has improved as consumers are looking confident. Earlier we saw sharp surge and upward revision of US GDP.

US mortgage rates are already hinting that the recovery has surely accelerated, though share market is showing unusual resilience and did not react to the tapering threat probably sensing that corporate profit will rise due to improving economic conditions. But do not be too optimistic about the share market growth as FED tapering also means withdrawal of cheap liquidity that should have adverse impact when implemented.

Friday’s reaction to the US jobs data was very unusual, as there was no positive re-action to the US unemployment data. Market chased trend by avoiding economic factor. US bond market is the best example, as 10-year bond yield after a brief surge, fell back to 2.86 pct. Allan Greenspan once warned that “when the bond market begins to move, FED might not be able to control it”.

In my view, we could soon be heading for a sharp move. What may have stopped US Dollar gain is the absence of FED official’s statement on the recent US economic pick-up. In recent past we have seen them defending tapering against jobs condition and growth, both have showed remarkable recovery.

The biggest challenge for US Central Bank is that it has to seriously consider start easing up its conventional and controversial stimulus program that is pumping USD 85 billion a month. Further delay will question FED’s credibility, as it has earlier in June declared that it may end up tapering by March 2014 based on fundamentals, which is as per projection, since unemployment has hit 7 pct and GDP is on the rise. Housing market continues to flourish.

Furthermore, all indications are that next month’s economic data will show better economic performance due to holiday season that should inflate demand. Therefore, there is no reason to further delay tapering. If FED is no rush and decides to continue its bond purchase program, then it should tell the market that why it is misguiding by deviating from its earlier (June) announcement when it is meeting its target and why is Fed unable to implement tapering. Low inflation was never its target and this could be a lame excuse.

It is very surprising that the Dovish FED officials have once again failed to read the US economic trend correctly and have been constantly trumpeting fearing economic slowdown and needs for more liquidity injection. So far estimates are FED has injected nearly USD 3 Trillion.

While, earlier on Thursday, the unexpected did not happen as ECB went for hold, but following monetary policy announcement in his press appearance ECB President Draghi answered with confidence, despite European Central Bank struggling for economic recovery and making poor future projection for the Euro-zone region.

Euro to my surprise did not weaken despite hint if slowdown in European and good economic recovery in USA. I still believe this could be false up move. If market believes that tapering and early rate hike is priced in then this is wishful thinking because once tapering is announced, no matter whatever may the size, market will become nervous and jittery. Remember this is not going to one time tapering, liquidity injection will gradually halt that has many strings attached. One hitch that may have hindered US Dollar’s rally could be the legislative factor that has deadline date for a Budget deal of December 13.

However, keep a close watch on emerging markets that should show signs of nervousness, as prior to any move its stock market will once again start melting and currencies will come under pressure and do not trust US bond market as holder of US treasuries could soon start losing its patience. More importantly, this time speeches from FED official should provide the real lead. 

GBP/USD 28-11-2013

GBP/USD moment of truth is here. What brought us to present 1.6300 levels was a steady rise in UK interest rates supported by 2 year Gilts since last February in a more healthy UK repo market. This situation would wholly explain consistency in great UK economic data and GBP's rise. Its a fascinating insight how this works but more importantly is why wouldn't Carney take the job. Its literally a no brainer decision since the UK is working wonderfully on all cylinders.

  Now UK interest rates currently sit 0.001 above yearly averages while 2 year Gilt yields sit at 0.427. Gilts in terms of overnight Bank Flow Reports hit stratospheric purchase levels all week so our rally may be in for a correction. If the 2 year Gilt Yield falls below 0.425 thereabouts and  interest rates drop below current prices, the big GBP short is here. Inversely, if levels hold, we go higher. I fault again these idiotic analysts abdication of their responsibilities to not bring this info to all at fxstreet dot com and dot net.

 Levels to watch today is the range between 1.6332 - 1.6246. What separates this range is an MA line at 1.6290 that decides Long/Short. Higher prices must break and hold exactly above 1.6332. That occurrence allows a clear path to 1.6637 and 1.6647. A failure to break and hold may see a test to 1.6045. Look for the range 1.6332 - 1.6246 to hold today but watch closely the 11 - 12 hour for any price changes / range breaks.

 We reach extreme prices: 1.6345, 1.6371, 1.6385. Watch closely 1.6345 if seen on a range break. That;s a perfect short point if seen for today. This price level tells me if a range break is seen it could very well be a false break. Interesting price developments for GBP but caution is still advised until confirmation of direction

Falling Gold Prices and the Forex Market

Back in January, I shared 3 reasons why gold prices could slide for the rest of 2013. Since then, the precious metal has tumbled roughly 25% from the $1,500/ounce level to test its yearly lows near $1,200/ounce. Is gold in for more losses for the last stretch of the year? More importantly, how can forex traders like you and me profit from all this?

Before we start talking about catching pips, let’s take a quick walk down memory lane to understand the correlation between the U.S. dollar (blue) and the price of gold (green).

As you can see from the chart above, the U.S. dollar typically has an inverse relationship with gold. During the second quarter of this year, the prospect of the Fed tapering its bond purchases came up and led to a strong dollar rally. However, when U.S. economic data failed to show enough momentum, the dollar erased its gains in the following months.

However, the correlation seemed to go haywire in the third quarter of the year, as FOMC officials and U.S. reports gave mixed signals on the Fed taper. This month though, it appears that gold and the U.S. dollar are headed in opposite directions once again since markets seem to be more convinced that the U.S. central bank is ready to reduce bond purchases sooner or later.

Another intermarket relationship that’s worth taking note of is the one between gold and the Australian dollar. In our School of Pipsology lesson on gold, we demonstrated how the precious metal has a positive correlation with AUD. This is because Australia is one of the world’s top gold producers and stands to gain some serious moolah when gold prices rise.

Lastly, with Switzerland having 25% of its money backed by gold reserves, it might be worth paying attention to the franc’s reaction to gold price action.

There you have it, ladies and gents! If you think that the gold selloff is likely to carry on for the rest of the year, then you could consider a long-term short AUD/USD or long USD/CHF position. On the flip side, if you think that a bounce is in the cards once gold tests the $1,200/ounce levels, you could wait for a reversal on these pairs.

Cable outlook week 25-29 Nov 2013

The pound pushed higher against the dollar on Friday, tracking gains in the euro following the release of stronger-than-forecast German business confidence data.

GBP/USD ended Friday’s session at 1.6225, the highest since October 25, up from Thursday’s close of 1.6197. For the week, the pair gained 0.69%.

Cable is likely to find support at 1.6150 and resistance at 1.6255, the high of October 23.

Germany’s Ifo business climate index rose to 109.3 in November, its highest level since April 2012, from 107.4 in October. Economists had expected the index to tick up to 107.7.

The data pointed to a broad based recovery in the euro zone’s largest economy and eased concerns over the possibility of further rate cuts by the European Central Bank.

Sterling was lower against the euro following the release of the data, with EUR/GBP rising 0.41% to 0.8355 at the close, from 0.8320 on Thursday.

Elsewhere, the pound rose to its highest level against the yen since October 2008, with GBP/JPY settling at 164.29, up from 163.84 on Thursday. The yen came under broad selling pressure amid heightened expectations that the Bank of Japan could implement a fresh round of monetary easing early next year.

In the U.K., Wednesday’s minutes of the Bank of England’s November meeting said that recent economic data pointed to a sustained recovery since the bank’s August inflation report, but warned that low levels of inflation within the euro zone could act as a drag on growth.

The minutes also indicated that there were questions over the “durability” of the U.K. recovery past the end of this year and said there was a case for not raising interest rates immediately when the 7% unemployment threshold was reached.

Meanwhile, the minutes of the Federal Reserve’s October meeting said the bank could start scaling back its USD85 billion-a-month asset purchase program in the “coming months” if the economy continues to improve as expected.

In the week ahead, the U.S. is to release a series of reports on the housing sector, as well as data on consumer confidence and durable goods orders. BoE Governor Mark Carney is to testify on inflation to parliament’s Treasury Committee and the bank is to publish its semi-annual financial stability report.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, November 25

The U.S. is to release private sector data on pending home sales, a leading indicator of economic health.

Tuesday, November 26
BoE Governor Mark Carney and several BoE policymakers are to testify on the outlook for inflation and economic growth before parliament’s Treasury Committee.

The U.S. is to produce data on building permits, a leading indicator of future construction activity as well as a report on housing starts. The nation is also to release private sector data on consumer confidence and house price inflation.

Wednesday, November 27

The U.K. is to release revised data on third quarter economic growth, as well as preliminary data on business investment.

The U.S. is to release data on durable goods orders, a leading indicator of production, as well as a report on manufacturing activity in the Chicago region and revised data on consumer sentiment. The Labor Department is to release the weekly report on initial jobless claims one day ahead of schedule due to Thursday’s Thanksgiving holiday.

Thursday, November 28

The BoE is to publish its twice yearly financial stability report. BoE Governor Mark Carney is to hold a press conference about the report.
Markets in the U.S. will be closed for the Thanksgiving holiday.

Friday, November 29

The U.K. is to release data on net lending to individuals and mortgage approvals.

Euro Trend for the Week 25-29 Nov 2013

Bit risky trading ahead of this week due to positive release of data specially from Germany and Draghi compelled to make a statement after facing heavy criticism from German media to tone down his earlier European slowdown concern helped Euro’s recovery. Earlier mildly Dovish stance by Yellen during her nomination appearance in front of Banking senate Committee is also weighing on US Dollar. But in comparison Europe has more economic problems, as compared to strong German growth, which could disturb German celebration, since overall Euro region’s economy is faced with bigger challenges.
Euro could benefit, as technically it closed above 1.3480-90, which remain a strong support level and only break would challenge 1.3420-50 zones. However, it will have to take out the 1.3547 level to prevent a return to the 1.3295 level. Further out, resistance resides at the 1.3650 level where a break will aim at the 1.3710 level. Price hesitation may occur here but if violated it will target the 1.3800 level. Conversely, support lies at the 1.3300 level with a break turning focus to the 1.3250 level and possibly lower towards the 1.3200 level. We may see bulls come in here and turn the pair higher but further decline is seen expect a move lower towards the 1.3100 level. All in all, EUR remains biased to the upside in the medium though vulnerable.

Technical lines from top to bottom:

1.3870 capped the pair during the fall of 2011 and served as the “shoulders” in a H&S pattern. 1.38 is a round number and also worked as a temporary cap during that period of time and also in October 2013.

1.3710 was the previous 2013 peak, and served as a clear separator. The pair needed a big trigger to break above this line, and when it lost it again, the fall was painful.

1.3650 temporarily capped the pair during that period of time and is stronger after capping the pair in October 2013. It returns to serve as resistance. 1.3570 is the swing high of September 2013 and also proved itself as resistance quite a few times afterwards. It temporarily stopped the avalanche.

1.35 is a nice round number and was a pivotal line or “magnet” within the previous range. 1.3440 worked as a clear separator in early November 2013 and is a key line to the upside.

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.

It is followed by 1.3240, which capped the pair in April and also had a role in August. It worked as support in September. 1.3175 capped the pair during July 2013.

1.3100 is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July and providing support in September. It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, but it is less significant now.

The very round 1.30 line was a tough line of resistance. In addition to being a round number, it also served as strong support and recently worked as a pivot line. 1.2940 is the next line of support. It worked as such during April and May 2013.