Daily FX Summary: October 19
Courtesy of Talking Forex
The PBOC caught markets off guard on Tuesday after the central bank raised its 1y lending and deposit rates by 25bps in what was the first official tightening move since 2007. As such, in what looked like an attempt not only to suppress inflation expectations but also an attempt to ease potential trade wars between China and the US caused markets to fret over the potential implications on growth and also demand for commodities in the region. In turn, the USD continued to rebound from current oversold levels and gained over 1.00%. As a result, commodity linked currencies such as AUD, NZD and CAD posted heavy losses against the greenback.
Despite better than expected Eurozone economic data, as well as a well received Spanish T-bills auction, the EUR came under heavy selling pressure on Tuesday as traders were forced to liquidate long positions amid a sharp recovery by the USD. The move lower saw the pair break below the key 61.8% Fibonacci retracement level at 1.3896 and briefly fall below 1.3800 level. Going forward, the pair is expected to come under further selling pressure, largely due to what is seen as a technical rebound by the USD index. In terms of other levels, major support to the downside is seen at the 50.0% Fibonacci retracement level at 1.3511. Also, concerns may resurface regarding the debt ridden states in the EU which would further intensify the profit taking that is currently taking place.
The price action on Tuesday saw the pair not only convincingly break below the key 61.8% Fibonacci retracement level but also fall below the 30DMA at 1.5735, which was largely driven by a rebound by the USD index amid the greenback supportive comments from US Treasury Secretary Timothy Geithner. Going forward, much of the attention on Wednesday will be on the release of the minutes from the latest rate setting meeting by the BoE which may show a 3-way vote split by the MPC. Consequently, GBP will likely weaken further and continue on its downward trend with 1.5500 as a main near-term target. Wednesday also sees the release of the Spending Review by the Coalition government which is unlikely to reveal any “new” information and as such is unlikely to prove to be a market moving event. In terms of technical levels, support levels are found at 1.5700, 1.5670/50. While to the upside, the pair is expected to face resistance at 1.5750/80 and then at 1.5800.
The rebound by the USD meant that the pair was finally allowed to post rare gains and weaken towards 82.00 levels. However, unless the USD rebound continues to be the dominant theme on Wednesday, the upward trend by the pair is unlikely to persist. As such, risks are still tilted to the downside and the long-term downtrend still stands. It is worth noting that Japanese government cut its economic assessment on Tuesday and said that the economy is at a standstill and wants the BoJ to support economy through appropriate, and flexible monetary policy. This then suggests that FX is just one of the many tools that the BoJ may use in order to tackle what looks like a stagnating Japanese economy.