Geopolitical risks dominate
Forex Weekly Review and Outlook
Geo-political worries dominated the forex market last week. Tension in Middle East escalated, bombings in India and North Korea missile launches being unresolved are the main events last week that overrode the importance of BoJ’s first in 6 years rate hike and all economic data release. Yen and Euro were under tremendous pressure. Investors are moving money out from Euro and Yen and moving into dollar, sterling, swiss franc pushing the respective pairs out of previous week’s range.
There are some arguments for what’s happening:
- Safe haven buying moving into currencies with higher yields. USD (Benchmark rate at 5.25%), GBP (4.5%), AUD (5.75%) being the preferred ones
- Traditional safe haven buying of CHF
- Crude Oil rally which made a record high of $78.4 could reinitiated Fed’s concerns on inflation which could delay their pause
- With Japan being totally dependent on oil import, rising oil prices usually hurts Japanese economy more than others
- Dim hope of another hike by BoJ this year while the ending of ZIRP was priced in
- North Korea issue putting additi0nal pressure on JPY
- Gold’s strong rebound continues to above 660 provides additional support to AUD, with AUD/USD even closing up and above last week’s high.
- CAD was weak since BoC has indicated no further hike is needed after keep rates unchanged last week.
Looking further, these factors could continue to play for a while. And one important point to note is that EUR/USD’s weakness has brought it to key near term support level which could be an early warning of underlying medium term strength in dollar which is already seen in USD/JPY. Breaking of this support could trigger further dollar buying against euro, which in turn trigger more broad based dollar strength. While Sterling and Swissy remained steady last week, risk is there.
This week’s economic calendar is jammed packed with important indicators with special importance in US PPI and CPI inflation, housing data and capital flow. Out of US, we’ll also have Empire State and Philly Fed survey. Eurozone’s focus will be on June inflation and German ZEW investor confidence. Also, UK inflation, retail sales and MPC minutes will also be released.
USD/JPY has edged lower to 113.39 initially last week but was supported by mentioned key cluster support of 113.37 (61.8% retracement of 111.31 to 116.69 at 113.37 too). Subsequent 300 pts rebound has brought USD/JPY to as high as 116.38. At this point, our original view still holds.
Recapping previous discussion, USD/JPY’s rebound from 108.99 has completed at 116.69, after failing to break firmly above fibo resistance of 116.65 (61.8% retracement of 121.38 to 108.99). However, since strength and time of the rebound form 108.99 is suggesting that the whole fall from 121.38 have completed with 3 waves down to 108.99 and further rally is still in favor to follow towards 118.88 resistance. And USD/JPY’s being held by 113.37 cluster is adding credence to this case.
Zooming into near term picture, the corrective fall from 116.69 has completed with 3 waves down to 113.39. The current 5 wave rally from there could represents resumption of the whole rise from 108.99. Overbought condition might limit USD/JPY’s upside by 116.65/69 cluster resistance initially this week. A drop below 115.69 minor support will signal USD/JPY as turn into consolidation with risk of pull back to 114.99 support. However, downside should be contained well above 114.06 support and bring rally resumption. Firm break above 116.65/69 will confirm medium term rise from 108.99 has resumed for 118.88 resistance first.
Shing-Ip Tsui (Shing) is the founder and CEO of www.ActionForex.com. ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.