Sterling Euro - some direction at last?

Sterling Euro looks poised - for a further weakening of Sterling

The Technical Trader's view:

MONTHLY CHART

After the bull surge for the Euro from the completed Head and Shoulders Reversal the market has been consolidating in a large triangle since the beginning of 2009.

Triangles tend to be continuation patterns.

Look closer.

WEEKLY CHART

The detail of the possible triangle is clearer here.

But it is far from completion.

Within the Triangle there is a possible bull falling wedge

Look closer still.

DAILY CHART

The market is on the point of completing that wedge – a confirmed close above 0.8887 in the next few days should see fresh buying.

Notice the 0.8838 resistance has been overcome - that was quite a considerable bull feat ( it was a 50% retracement resistance too) and suggests the bulls have a good deal further to go on the upside - entailing a clear break of the wedge. Note too that the 61.8% Fibonacci is coincident with the break of the wedge adding to the bull energy on a breakout.

Mark Sturdy

Seven Days Ahead

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Awaiting EUR/USD Reaction At 61.8% Level

The FX Trader’s view - The EUR/USD has continued to grind lower, reluctant to embark on any meaningful rebound phase. Earlier supports have given way but, now, the 61.8% pullback level has been neared, offering sidelined bulls another chance.

• WEEKLY CHART: The reversal in trend at the 76.4% recovery level has so far been characterised by muted recovery attempts. Earlier support, which included the old 1.3737 Mar-09 high area, failed and the 61.8% retracement around 1.3400 is now under scrutiny. Now look closer…
• DAILY CHART: Note how the s/term chart structure has subtly changed in Feb – this has been accompanied by positive RSI divergence signs, which call for bears to be more cautious now. This is occurring on the approach to the 61.8% pullback level (see Weekly chart above). At this stage a close above the 1.3800 area would be an initial positive sign, but further s/term indecision could be seen before any recovery got properly underway.

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Bears Still a Threat in EUA Carbon Emissions

The Commodity Specialist view - A marked consolidation has been unfolding in the EUA (ICE ECX) contract, displaying a slow downward bias. So far bears have been unable to develop this more in their favour, but, now, they have another chance – will they take it?

• WEEKLY CHART - CONTINUATION: The 38.2% recovery level remains first key resistance on this long term chart. The current multi-month consolidation (with slight bear bias) continues to unfold. Any shorter term weakness should prove temporary though.
• DAILY CHART – DEC-10: Note how nicely support has developed at the 50% retracement. It is again under pressure, following lacklustre rally attempts, with current risk of a better break. This would turn initial focus towards the channel base projection at 11.10 currently. However, also note lower 76.4% level at 10.30 which lies close to a Fibo projection at 10.38 – the temptation would be to target this area. Overhead, the hurdles include s/term 76.4% bounce level at 14.48, falling resistance line just above and then 15.17 08-Dec high. A breach of the latter would violate the pattern of falling highs and lows, and turn the tables in favour of the bulls.

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The Dollar still looks strong against the Euro

Greece has moved out of the spotlight after the Greek government received non-financial support from the EU/Euro zone leaders and pledged to enact a fiscal austerity package aimed at sharply reducing the budget deficit. Yet the Dollar remains well bid. What other factors are now in play that offer such solid support?

The Macro Trader’s view:

The current Dollar rally began late in 2009 and was driven initially by some strong US economic data. But even when that data turned a little mixed, the Dollar continued to rally.

More recently the rally was driven by a sharp increase of risk aversion caused by the Greek debt crisis, as traders fretted about a Greek Government debt default which, if it occurred, could have spread to other developed economies suffering similar fiscal problems.

But now Greece has moved out of the spotlight after the Greek government received non-financial support from the EU/Euro zone leaders and Greece pledged to enact a fiscal austerity package aimed at sharply reducing the budget deficit. Yet the Dollar remains well bid. What other factors are now in play that offer such solid support?

The US and Euro zone economies have both recently published Q4 GDP data. The US showed growth on an annualized basis of 5.7%, much stronger than expected and clear evidence that recovery is under way.

But the Euro zone reported Q4 GDP of 0.1%q/q and -1.9%y/y. Even if the Euro zone number is annualized to make a better comparison with the US, the growth rate is only 0.4%. Clearly the US economy is doing very much better than the Euro zone. But not only that, the Euro zone economy has lost momentum and growth there has cooled off.

More worryingly still, the German economy, which remains the largest of the Euro zone and has been a motor for recent growth, was even weaker than the Euro zone 4th Quarter average at 0.0q/q.

So the Dollar is benefitting from the US economy’s clear out-performance of the Euro zone.

Moreover, the news this week that China has sold a large tranche of US Treasury bonds has failed to dent the Dollar’s strength. Previously the Dollar had looked vulnerable to threats from China and others if they sought to diversify their foreign currency reserves away from the Dollar.

Another source of support is the Fed. Bernanke recently spelt out how the Fed would begin removing the extraordinary monetary policy stimulus put in place to avert a financial market meltdown. Of course he re-iterated the commitment to maintaining low official interest rates but traders see the Feds actions as starting to normalise monetary policy. This is a sure sign of recovery and that gives additional confidence in the US Currency.

So for now the Euro looks like emerging as the weaker of the two major global currencies as the Dollar claws back some of the losses it has sustained over the multi year period of weakness.

The Technical Trader’s view:

WEEKLY CHART

The two massive supports for the market – from the Prior Highs at 1.4336 and 1.3733 have been breached.

And with the latter, the 50% Fibonacci support at 1.38 has been smashed at the same time.

That looks poor.

DAILY CHART

Bears will rejoice at the solidity of the bear trend over the last few weeks.

Note well how prior lows have been good resistance- where successive rallies have petered out.

The consolidation of the last two weeks looks set to break to the downside – watch for a break of 1.3535.

Continuing the bear trend.

Mark Sturdy

John Lewis

Seven Days Ahead

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GBP/USD Support Only Temporary

The FX Trader’s view - After finding strong resistance last year GBP/USD has now started to break through 38.2% support, which was effective in Oct-09. Slightly lower support has emerged but s/term rallies should be temporary prior to a deeper pullback.

• WEEKLY CHART: Last year’s recovery found clear resistance from the 2005 1.7043 low, but also note that this was close to a 50% retracement, of the fall from the Jul-08 2.0153 breakdown point.
• DAILY CHART: Recent violation of the 38.2% pullback level was a negative sign, but in the Commodity Specialist Guide we had been anticipating s/term support from a bear channel base projection, running through 1.5500 currently. This has been seen, though rally attempts have been muted so far – resistance coming from the 1.5830 30-Dec low. In the event of renewed strength bears don’t want to see higher resistance from the small channel top projection (approaching 1.6200 now) exceeded at this stage. Meanwhile, a break/close below 1.5500 would immediately expose the 1.5270 50% pullback – sometimes a good level in GBP-related markets. However, the power should be there to push lower shorter term, with a 1.5100 Fibo projection next on the list.

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Further Losses Brewing in Coffee

The Commodity Specialist view - The second half of last year was marked by quite choppy action, with nevertheless a clear upward bias. Recently this succession of rising highs and lows was broken, establishing a bear trend that looks to have further to go.

• WEEKLY CHART - CONTINUATION: The 2009 recovery failed ahead of the 76.4% retracement and, now, the Jan break of the rising support line has put bears in control.
• DAILY CHART – MAY-10: The succession of rising lows seen over previous months was finally broken after failure of the 38.2% level and 137.50 04-Jan low. This low remains first resistance, above which note the rising return line running close to 140.00 currently. S/term support has come from our first support area of interest, the 130.55 61.8% pullback level and Fibo projection (1.618 swing off prior 137.50-148.70 bounce) at the same level. Any bounce should prove temporary, ahead of lower targets. Note that the lower Fibo projection, 2.618 swing target, coincides nicely with the 61.8% pullback on the Weekly chart above.

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Are the Gold bears broken? It's not clear

The Gold market continues to frustrate both Bulls and Bears. Although the highs were made in early December 2009, the long drawn-out retreat has been orderly. After several failed attempts to re-establish the underlying Bull trend. Are there the preconditions of a more successful resumption of that trend in the near future?

The Technical Trader's view:

WEEKLY CHART

The pull-back to the massive support from the prior High at 1033 has almost made it. The long run Neckline was a little higher than there at about 1042 or so.

Like many others we have been watching it and wondering: did that pull-back get close enough for bulls to buy for the bounce - since we remain wedded to the medium term bull pattern and target of very much higher? About 1350 in fact.

Look closer.

DAILY CHART

Well, it got pretty close to 1033.

And in the April 10 contract there was a band of support from Prior Highs at 1031-15.

That wasn't quite tested either.

But the market has bounced. Rather impressively, you might say, surging (as Gold does) through the resistance from two prior lows above the market at1073-5 or so. But we are not totally convinced.

There is a falling diagonal well-established above the market at 1110. Now, lacking a Reversal pattern at the supports, we would require a close above that diagonal before buying. Completing a bull falling wedge.

The Macro Trader's view:

The Gold market continues to frustrate both Bulls and Bears. Although the highs were made in early December 2009, the long drawn-out retreat has been orderly. And on two occasions the market has attempted to re-establish the underlying Bull trend.

What lies behind the price action?

We judge gold is in a consolidation phase. Since gold made the high last December the Dollar has enjoyed a period of strength. Initially this was driven by improving data, and has been aided on several occasions by spikes in risk aversion.

The current leg of the Dollar rally, Gold weakness, is again due to risk aversion. This is currently centered on the Sovereign risk concerns provoked by Greece and other weak peripheral Euro zone members.

But the question begs asking: if Sovereign risk deterioration is behind recent price action in currencies, stocks and Bonds, why is Gold not rallying hard?

Because of the nature of the Euro zone, traders are unable to sell national currencies for Greece et al because they no longer exist, but what they have been doing is selling Greek, Spanish and Portuguese Government Bonds and Buying Bunds. This has caused yield spreads to widen out sharply and has caused the Euro to weaken against mainly the Dollar and the Yen as fears of a Greek default have increased. So traders are buying the Dollar more as a default consequence of wishing to sell the Euro. But a stronger Dollar usually equals a weaker Gold market.

At some point traders will stand back, re-assess and recognize that the fiscal health of the US isn't any better than the Euro zone countries currently being targeted. What so far makes the difference between US debt and that of Greece is confidence. The US has a long history of honouring its obligations. As the world's largest economy by a margin, with the Dollar the World's sole reserve currency, traders/investors are giving the US the benefit of the doubt over the management of its government finances.

But that can only be stretched so far and the credit rating agencies have begun flagging risks. Obama continues to forecast large budget deficits which are piling up the national debt and although he has said he wants to halve the deficit by the end of his Presidential term, so far his actions don't match that aspiration. So the Dollar buying may come to an end. And it may yet begin to be sold. If the Euro zone does manage to calm the current crisis, traders will refocus. The UK and US could yet find their bond markets and currencies coming under renewed pressure and that would lift gold.

Mark Sturdy John Lewis

Seven Days Ahead

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USD/CAD Still Trying To Base

The FX Trader’s view - After the 2009 decline clear support has been emerging from above the 1.0200 level. The signs are promising for the bulls, but they still require an extra effort before a base can be said to be complete.

• WEEKLY CHART: The 2009 downmove stopped short of the 76.4% level at 1.0000. Support, in fact, was found close to the 1.0296 Sep-08 low, the take-off point for the last major upleg.
• DAILY CHART: A drift back in price saw support emerge in Jan from around the 1.0204 Oct-09 low, keeping that long term 1.0000 76.4% level on the Weekly chart out of reach). Subsequent recovery has now seen a break of the s/term falling resistance line, but key is the higher resistance around the 1.0880 23.6% level – recovery through this would also mean violation of the bear channel top projection (near 1.0800 currently). -It would be a clear bull sign, completing a nice base in the process. We would then be in a position to look at higher targets, the first obvious one being the 38.2% recovery towards 1.1300.

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Key Reversal Signs Retreat, Which Recent Bulls in Sugar Beat

The Commodity Specialist view - Another Key Reversal Week in Sugar has appeared, an earlier one seen in Sep-09, which marked a distinct pause in uptrend. Prospects for another pause/pullback phase are currently good, so we here take a look at the technical factors.

• WEEKLY CHART - CONTINUATION: Last week’s sell-off produced a Key Reversal Week, although the new high prior to reversal was marginal. Nevertheless, we still think the signal must be given due respect. First possible support comes from the 25.70 23.6% pullback level – but also note the 24.85 Sep-09 high not much below. A s/term bounce would not surprise from around here, but should prove temporary.
• DAILY CHART – MAR-10: Previously in the Commodity Specialist Guide we had noted an apparent lack of bull conviction, accompanied by a negative RSI divergence. The current sell-off is no surprise; but that Key Reversal Week signals something more – any rally is likely to be temporary ahead of further weakness. A s/term support area is now being tested, starting with the 26.25 01-Sep high, and including the 50% & 61.8% pullback levels (which coincide quite well with supports on the Weekly chart). So a temporary bounce looks likely. Further important support also lies at the 76.4% level and channel base projection around 23.50.
• We have said in the Guide that early bears may favour sales in the 28.00/29.00 area, stops just above the 30.40 high for limited risk, targeting 24.00 for partial profits.

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Sterling: the futures converging to cash

The Short Sterling futures market has been too bearish, expecting the Bank of England to begin raising interest rates both sooner and further than now appears the case.

The Macro Trader’s view:

The Short Sterling futures market has been too bearish, expecting the Bank of England to begin raising interest rates both sooner and further than now appears the case.

Despite:
- record low interest rates,

- an unprecedented quantum easing program by the Bank of England, and

- a sizeable fiscal stimulus and debt deterioration, that is unparalleled in peace time.

The economy only just managing to limp out of recession in the 4th Quarter. And the economy still looks in need of assistance. The Bank has now stopped its QE program as CPI inflation and RPI inflation are both in positive territory, indeed, CPI is well above target. Why then isn’t the Bank’s MPC raising rates to control inflation? That is because economic activity remains weak. Also, a large output gap has opened up in the economy because of the depth of the recession and monetary policy makers expect this to bear down on inflation and bring it back below target.

In fact, the Bank of England had forecast this current ‘temporary’ spike which they attributed to one-off factors such as last year’s VAT cut which was restored earlier this year.

There another reason why they are likely to leave interest rates at current low levels for much of, if not all of this year. For without low rates the economy will not survive the impending fiscal consolidation so necessary to reduce the budget deficit and the level of debt compared to GDP. Whomever is returned to office will have to take concrete steps to cut the deficit, Labour probably through higher taxes, the Conservatives favour spending cuts.

If the deficits are not reduced, rating agencies have already warned the UK’s AAA sovereign rating could be at risk without serious fiscal consolidation, and that would be bad news for funding the deficit.

Official interest rates are 0.50% and 3 month LIBOR is currently about 0.625%. The Short Sterling futures strip could rally a long way to achieve convergence.

Of course economic data could suddenly pick up, or the ONS measure of GDP could be revised higher, but on current data, a bull convergence prior to maturity looks most likely.

The Technical Trader’s view:

WEEKLY CHART MAR 2011 CONTRACT

The chart of the short-sterling futures contract is powerfully constructed as the market ratchets better on successive highs as they act as support.

DAILY CHART MAR 2011 CONTRACT

The continuation Head and Shoulders pattern in the March 2011 has completed and is set to drive the market a good deal better still.

The minimum move? About 98.45.

Mark Sturdy John Lewis

Seven Days Ahead

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Bulls Eye Next Target in US Dollar Index

The FX Trader’s view - The expected recovery in the US Dollar is now nicely underway. With a second upleg in process our focus is on the next target/resistance area, where the uptrend is likely to pause.

• MONTHLY CHART: The main sign in 2008 that long term bears were losing momentum was the breach of the bear channel top projection. Subsequent resistance from around the 38.2% recovery level prompted a pullback. Note that the 76.4% pullback area provided quite nice support.
• DAILY CHART: After the first upleg in Dec and temporary pullback, a second upleg has got underway, aided by a better break of the 23.6% level. Next upside focus begins at 80.00 , the 38.2% recovery level, but also note the s/term bull channel top projection currently coinciding with an equality target at 80.90 (‘74.170-78.449’ upleg extended off 76.601 low). We would be on the lookout for resistance up here. At present first support comes from the channel base around 78.00, ahead of the 76.601 13-Jan low. Ideally this latter will hold else the expected continued recovery would be delayed.

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CRB Index – Bearish Key Reversal Month

The Commodity Specialist view - After deep losses in the CRB Index in 2008, 2009 was marked by a recovery attempt – and to date it has fallen short of the 38.2% retracement. This has been accompanied by certain bear signs that herald a medium term pullback phase now.

• MONTHLY CHART: Following a brief push through the 284.61 Jan-07 low the market has struggled. In fact the sell-off in Jan produced a negative Key Reversal Month, its impact perhaps aided by the fact that the trading month was made up of four complete weeks.
• WEEKLY CHART: On the Weekly chart note how the recovery from 2009 low failed ahead of the 38.2% retracement level. There was a well-defined uptrend line which has been clearly broken, implying a deeper pullback phase has got underway.
• DAILY CHART – MAR-10: After the earlier drop below the 280.00 area the bear argument strengthened following the break of the s/term bull channel base projection, and then 271.66 23.6% pullback (of whole 2009 recovery). This was our cue to adopt a bear stance in the Commodity Specialist Guide, supported by that key reversal month, above. Any bounce should prove short-lived, ahead of a further downleg, possible resistance around 280.00. Look out for s/term support centring on 260 (larger channel base projection just above, 38.2% just below). But the Index should push lower in due course.

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