This week is very significant in currency markets, as several trends seem to be starting, which can significantly influence competitiveness Authors of this post present their own interpretation of the situation in main currency pairs, as well as give some tips for short and medium term trading.
American economy seems to be Services and Markit composite PMI (see meaning of this index in previous articles) showed lower figures than previously. Moreover, there are significant doubts that American economy continues to grow, and most recent estimates for its current monthly growth rate are around zero. This is an adequate reaction to the dollar appreciation against all main currencies during the past several months. Indeed, US trading balance in March has scored its lowest in several decades in some industries, with overall CA reaching the figure of minus 51 bill USD.
ADP non−farm employment has increased only by 169K in April instead of 200K expected, which lead to an instant depreciation by around 70 points against main currencies. Some more figures describing the economy of the US is awaited this and next week, and we have enough evidence to think that this will be soon become included in prices.
The euro has given up to follow the situation in Greece, as the tribulation of markets has been proving to be in vain again and again. Fears of the probable Grexit have become significantly smaller. Furthermore, traders have recalled that the European economy is at its early stage of cyclical growth, and the number of reasons to be positive is sufficient. Fortunately, this week hasn’t disappointed them – with German PMI falling only by 0.1%, there have been plenty of good data from Spain, Italy and France with services PMI growth by 3, 1.5 and 0.3 respectively. This is a strong argument for bullish movement of the currency in the short term.
The government of Germany has managed to create 0.7% budget surplus in 2014, which has given and upward pressure on government bond prices. Moreover, there has recently been a rumor that German Bundesbank will reduce the use of funds in government bonds by 80% in the following 12 months. As some analysts expect, it will lead to a drop in bonds’ profitability by 60−70 basis points, which, undoubtedly, will lead to a strong downward pressure on the euro in the medium term.
Two parties achieving the same rate of support rate several days before the elections (Tories with one−point lead, which can easily be due to statistical error) has risen doubts in the success of the future government, looking back at previous occasions when there were two parties of equal strength. Pound fluctuations are expected as usual when publishing elections results, but most probably the compound effect on markets will be bearish, because there is high chance that too close results will at once lead to speculations about probable re−elections at the end of the year. Additionally, the win of the Conservatives with David Cameron will make a downward pressure on the euro, since Mr Miliband is the one who has chances to prevent referendum of the UK leaving the European Union.
Together with increased fears at the beginning of the week, PMI of the construction sector has disappointed traders, and this explains so sharp decrease of the British currency. However, services PMI turned out to be not so bad, which is a positive sign taking into account the estimates of the UK economy halving its growth to 0.3% in the first quarter. To sum up, the medium−term trend is indecisive, and they are only short−term positions that offer a reasonable tradeoff between risk and profitability.
During the past ten weeks dollar index has formed an almost perfect “double top” structure, and is now currently traded at its bottom of 94. A breakthrough lower will mean further depreciation until 90−th figure, and this is the first significant trend that can start this month. The weakness of this and, most probably, next week seems to be an excellent opportunity to catch this trend almost from the very beginning. However, this should not be done in the pair with the yen because the medium term of the Japanese currency seems bearish.
The dynamics of this week is explained by PMI indices described previously, but the overall short−term perspective looks positive. EURUSD has recently left its bottom structure between 1.055 and 1.105, which is a reason to expect higher volatility during the next several months. The consolidation in the upward movement at the beginning of this week has added optimism, showing that the highly significant level 1.105 has given up the resistance and now has become a strong support level again, as at the beginning of the year.
Only a fall under 1.0825 will restore the downward pressure of the euro in the pair with dollar, which is supposed to represent an overall picture of the impact of ECB’s quantitative easing. The last argument is vital supporting the long−term depreciation trend, which is the reason why the pair cannot return in its “favourite” corridor between 1.20 and 1.46 – this makes a Sell Limit order just below this level very logical.
The behavior of GBPUSD was very positive, even unexpectedly good, after it has left the corridor below 1.5000, recovering from the recent year’s minimums, but its decrease after inability to touch 1.5500 level was even sharper – and we can expect its further consolidation between these two levels. This, together with the fundamental picture, makes attractive intra−week or even intra−day limit orders.
This currency is traded with a positive mood now. It has formed a “good−looking” recovery with high volatility in the middle and triple bottom. Indeed, it doesn’t struggle at any important resistance levels this week, whilst it finds support even higher and higher after each drop. Supposing the described fall of the dollar, the aussie should be bought now, and, should there be enough evidence of the beginning upward trend, we can strengthen the position.
EURUSD buy now SL 1.1176 TP 1.1438
EURUSD Buy Limit at price 1.1273 SL – TP 1.1555 Trailing Stop 70 pips
EURUSD Sell Stop at price 1.0799 SL 1.0934 TP 1.0587
EURUSD Sell Limit at price 1.1833 SL 1.2103 TP 1.0063
GBPUSD Sell Limit at price 1.5384 SL 1.5564 TP 1.5130
AUDUSD buy now SL 0.7836 TP 0.8174
AUDUSD Buy Stop SL – TP 0.8174 Trailing Stop 70 pips