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British Pound at Clear Risk as Positions Stretched and Gains Slowing

British Pound at Clear Risk as Positions Stretched and Gains Slowing

Fundamental Forecast for Pound:Neutral

The British Pound was the only major currency to strengthen against the US Dollar in a holiday-shortened week of trading, but can it continue higher? The high-flying Sterling will need support from the Bank of England to hold near multi-year peaks in the week ahead.

A strong wave of domestic economic data drove the lion’s share of British Pound gains, and indeed Sterling strength coincided with a big improvement in UK bond yields. The spread between the UK and US 2-year government bond yields stands at its largest in three years.

It’s with that in mind that we look for any surprises out of upcoming Bank of England Minutes as a potential catalyst for big GBP moves. The BoE released no details in the policy announcement following its April 10 meeting, and we can only speculate as to whether it remained a unanimous decision to keep rates and Quantitative Easing levels unchanged. And though officials would not have final UK unemployment figures released six days later, it will be interesting to hear whether labor market improvements could force the bank to tighten policy ahead of expectations.

The risks to the British Pound are clear: it has thus far set a fairly ominous daily reversal at multi-year highs. CFTC Commitment of Traders data likewise shows speculators are their most long GBP in over three years when it set a significant top near $1.65. And though important price and positioning extremes are only clear in hindsight, the fact that leveraged trades are stretched warns that gains may at least slow.

Traders have thus far seemed willing to push the British Pound to fresh highs, but it may take something special to keep the high-flying currency near these significant peaks. –DR

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Gold Carves Lower High in April- Bearish Below $1327

Gold Carves Lower High in April- Bearish Below $1327

Fundamental Forecast for Gold:Neutral

Gold is off sharply this week with the precious metal shedding 1.7% to trade at $1298 heading into the weekend. The sell-off comes on the back of the strong performance in US equity markets with all three major stock indices closing higher by 1-1.7% on the week. We will take a more neutral tone heading into next week on the heels of this decline while noting a broader bearish bias below key resistance which was tested this week.

Looking ahead, traders will be closely eying the US economic docket and the ongoing geopolitical tensions in between Ukraine and Russia. Existing/new home sales, durable goods orders and the final April read of the University of Michigan confidence survey will be on tap next week. With the recent Fed rhetoric suggesting that the markets continue to overstate the timing of Fed normalization, look for weaker than expected data to support gold at the expense of the greenback. The gold vs USD correlation continues to press deeper into inverse territory, posting its lowest levels since march 24th and we’ll look for a reaction off key support at 10,400 in the Dow Jones FXCM USDOLLAR Index (Ticker: USDOLLAR) for further conviction on our directional bias.

From a technical standpoint, gold reversed off a key inflection point we highlighted in last week’s outlook at $1327. This level is defined by the March opening range low, the 23.6% Fibonacci extension taken from the advance off the December 31st low and a longer-dated trendline resistance dating back to the 2012 high. The resulting move saw the daily RSI signature turnover ahead of the 60-theshold, keeping our broader focus on the short-side of gold. Look for support at the monthly open at $1283 with a break below shifting our focus to a massive support range at 1260/70. This region has triggered substantial inflections in gold prices dating back to June of last year with multiple longer-term and medium-term fib ratios once again highlighting the technical significance of this range.

Bottom line: Key interim resistance remains at $1327 and we continue to favor selling rallies with only a breach/close above this threshold invalidating the broader downside bias. The biggest risk to our outlook remains a broader risk sell-off which could trigger haven flows into the perceived safety of bullion. Look for a break above 1891 in the S&P to signal the end of the correction off the April high.

–MB

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Bullish USD/JPY Outlook at Risk as Japanese Inflation Picks Up

Bullish USD/JPY Outlook at Risk as Japanese Inflation Picks Up

Fundamental Forecast for Japanese Yen: Neutral

A further pickup in market sentiment should continue to fuel the near-term rally in the USD/JPY, but the fundamental developments coming out next week may keep the dollar-yen contained within the wedge/triangle formation as the Bank of Japan (BoJ) remains upbeat on the economy.

The recent rise in risk appetite may gather pace as the U.S. earnings season boosts trader confidence, and the ongoing themes in the financial markets may continue to heavily influence the USD/JPY as it remains highly correlated to equity prices.

Nevertheless, it seems as though the BoJ is in no rush to further expand its asset-purchase program as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation and another uptick in the region’s Consumer Price Index (CPI) may continue to alter the policy outlook as market participants scale back bets of seeing a larger quantitative-easing (QE) program. With that said, we may see a growing number of BoJ official show a greater willingness to carry the current policy into the second-half of 2014, and the USDJPY may continue to congest ahead of the next central bank meeting on April 30 as Fed Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP).

As a result, the USDJPY may continue to face narrowing ranges as it consolidates within the wedge/triangle formation from earlier this year, and it appears as though we’re going to need a key fundamental catalyst for a major move in the pair as market participants mull the outlook for monetary policy. – DS

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GBP/USD Outlook Favors ‘Buying Dips’ Ahead of Hawkish BoE Minutes

Talking Points:

- USDOLLAR Continues to Hold Below 10,470 Resistance Amid Holiday Trade

- GBP/USD Bullish Outlook to Gather Pace on Hawkish BoE Minutes

USDOLLAR Daily

GBP-USD-Outlook-Favors-Buying-Dips-Ahead-of-Hawkish-BoE-Minutes_body_Picture_3.png, GBP/USD Outlook Favors ‘Buying Dips’ Ahead of Hawkish BoE Minutes

Chart – Created Using FXCM Marketscope 2.0

  • Remains Capped by 10,470; Lower High in Place?
  • Interim Resistance: 10,602 (38.2 retracement) to 10,615 (78.6 expansion)
  • Interim Support: 10,406 (1.618 expansion)

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The lack of momentum to break above the 10,470 pivot may foster a bearish forecast for the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar), but the fundamental developments coming out of the world’s largest economy may heighten the appeal of the greenback as the resilience in private sector consumption raises the outlook for growth and inflation.

Indeed, another uptick in orders for U.S. Durable Goods paired with an upward revision in the U. of Michigan Confidence survey may put increased pressure on the Federal Reserve to normalize monetary policy sooner rather than later, but the reluctance to move away from the zero-interest rate policy (ZIRP) may continue to fuel the bearish sentiment surrounding the reserve currency as central bank Chair Janet Yellen continues to highlight the ongoing slack in private sector activity.

With that said, the bar remains high of seeing a material shift in the Fed’s policy outlook, and the USDOLLAR remains at risk for further losses as long as price & the Relative Strength Index (RSI) retain the bearish trend from earlier this year.

Read More:

Market Activity Set for Pickup on Heavy Event Risk Next Week

GBP-USD-Outlook-Favors-Buying-Dips-Ahead-of-Hawkish-BoE-Minutes_body_ScreenShot122.png, GBP/USD Outlook Favors ‘Buying Dips’ Ahead of Hawkish BoE Minutes

GBP/USD Daily

GBP/USD Daily Chart

  • Bullish Setup at Risk as GBP/USD Appears to Be Carving Near-Term Top
  • Interim Resistance: 1.6850-60 (78.6% expansion)
  • Interim Support: 1.6400 (61.8% expansion) to 1.6430 (23.6% expansion)

Join DailyFX on Demandto Cover Current British Pound Cross Trade Setups

The greenback ticked higher against two of the four components, with the British Pound and Japanese Yen dipping 0.3 percent, but the Bank of England (BoE) Minutes due out next week may spark fresh highs in the GBP/USD as the central bank comes under increased pressure to move away from its highly accommodative policy stance.

Indeed, the stronger recovery in the U.K. may raise the BoE’s scope to raise the benchmark interest rate ahead of schedule as rising home prices paired with the pickup in real wage growth raises the threat for inflation, and the central bank may do little to halt the ongoing appreciation in the British Pound as it helps the Monetary Policy Committee (MPC) achieve the 2 percent target for price growth.

In turn, we continue to favor the topside targets for the GBP/USD, and will look for opportunities to ‘buy dips’ as the pair continues to carve a series of higher highs & higher lows.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Key Risks to EUR, NZD, GBPAUD Scalp Setups

Talking Points

  • GBPAUD rally fizzles out ahead of key resistance- 1.8022/50 critical
  • NZDUSD eyes monthly low to validate broader reversal
  • EURUSD stuck in key inflection range 1.38-1.3830- weekly open in focus

GBPAUDDaily Chart

Forex-Key-Risks-to-EUR-NZD-GBPAUD-Scalp-Setups_body_Picture_3.png, Key Risks to EUR, NZD, GBPAUD Scalp Setups

Notes: Our favored setup this week was the GBPAUD scalp highlighted on Tuesday. The breach above channel resistance dating back to the March high coupled with a weekly opening range break shifted our focus to the topside with the subsequent rally turning over just 3pips ahead of the 1.8022/50 key resistance range. The focus heading into next week is whether or not this breakout will materialize into a more substantial rally as we keep focus on the broader head and shoulders formation which broke last month. Note that price closed the week just below resistance as the daily RSI signature held below a longer-term resistance trigger dating back to the December high. The broader outlook comes back into focus as we open up trade next week with only a breach/close above 1.8050 suggesting that a more significant low may have been put in this week.

Read more on the GBPAUD setup

NZDUSDDaily Chart

Forex-Key-Risks-to-EUR-NZD-GBPAUD-Scalp-Setups_body_Picture_2.png, Key Risks to EUR, NZD, GBPAUD Scalp Setups

Notes: The NZDUSD setup also played out well this week with a clear weekly opening range break below a Fibonacci support confluence at 8630 validating our bearish scalp bias early in the week. The resulting sell-off achieved two of our three support objectives before settling just below former trendline support/ Fibonacci confluence at 8582. A failure to hold above the initial April opening range highs keeps the focus on the monthly low at 8512 with a break below this threshold suggesting a more significant high was put in place this week.

Read more on the NZDUSD setup

EURUSD Daily Chart

Forex-Key-Risks-to-EUR-NZD-GBPAUD-Scalp-Setups_body_Picture_1.png, Key Risks to EUR, NZD, GBPAUD Scalp Setups

Chart Created Using FXCM Marketscope 2.0

Notes: Last week we noted the breach above the April opening range and although the pair continues to hold above the 1.38-handle (bullish invalidation) we remain neutral within the 1.38-1.3830 range. This region has riddled with reversals, throw-overs, and false breaks dating back to the October highs and is highlighted by key longer-term Fibonacci extensions and retracements. Note that we cannot invalidate the broader topside play here so long as price holds above 1.38 and we’ll look for the Sunday/weekly opening range to offer further clarity on our immediate scalp bias with a close below shifting our focus to the short-side of the euro.

Read more on the EURUSD setup

Follow the progress of these trade setups and more throughout the trading week with DailyFX on Demand.

—Written by Michael Boutros, Currency Strategist with DailyFX

For updates on this scalp and more setups follow him on Twitter @MBForex

To contact Michael email mboutros@dailyfx.com or Click Here to be added to his email distribution list

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Forex: Market Activity Set for Pickup on Heavy Event Risk Next Week

Talking Points:

  • NZ Dollar Corrects Higher in Otherwise Quiet Overnight Trading Session
  • Thin Liquidity May Amplify Volatility on Any Unforeseen Headline Risk
  • Market Activity Set for a Swift Pickup on Busy Event Calendar Next Week

The New Zealand Dollar outperformed in otherwise quiet Asian trade, rising as much as 0.2 percent on average against its leading counterparts. The move did not appear to reflect the influence of a particular single catalyst. Rather, the advance likely amounted to a correction after the Kiwi trailed its major currency counterparts against the US Dollar in yesterday’s session, losing a hefty 0.6 percent and slipping below chart support.

Looking ahead, most major financial markets will remain closed for the Good Friday holiday. In fact, key exchanges in Europe as well as Hong Kong and Australia will stay shuttered through Monday. That suggests that lackluster participation may make for a quiet end to the trading week. Ebbing pre-holiday liquidity may amplify any unforeseen headline-driven volatility however, warning those traders still holding open exposure to tread cautiously in the near term.

The coming week will bring ample top-tier event risk to reignite activity. The Reserve Bank of New Zealand (RBNZ) rate decision is on tap, with traders pricing in a 97 percent probability of another 25 basis point interest rate hike. Australian CPI data is expected to put headline year-on-year inflation rate at the highest in over two years, which may boost the RBA policy outlook and drive the Aussie upward. April’s preliminary set of Eurozone PMIs are forecast to show a further slowdown in manufacturing- and service-sector activity growth, which may further stoke speculation about a forthcoming expansion of ECB stimulus.

Finally, a busy docket of US activity data will help inform bets on the continuity of the Fed’s effort to “taper” QE asset purchases. Home Sales, Durable Goods Orders and Consumer Confidence figures are in the spotlight. Economic data outcomes from the world’s largest economy showed a notable improvement relative to expectations over the past two weeks (according to data compiled by Citigroup). If that trend continues, ebbing doubt about the continued withdrawal of Fed stimulus may offer yield-based support for the US Dollar.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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