[CURRENCY OUTLOOK] EURUSD enters a consolidation phase

In line with forecast, the EURUSD entered a consolidation phase last week after experiencing heavy selling following the ECB’s surprising interest rate decision the week prior.

In general, economic news from the EU was quiet, while ECB President Mario Draghi’s speech in Milan on Thursday failed to provide any unexpected volatility. US economic data was also low in quantity, however Friday’s news that Advance Retail Sales increased by 0.6% last month will be seen as encouraging for Q3 GDP.

The coming week should be busier for the pair, with the latest German ZEW Survey on Tuesday being followed by EU Inflation data on Wednesday. Also, on Wednesday evening, the Federal Reserve are expected to taper quantitative easing (QE) by a further $10bn, while also announcing a conclusion to QE in October which should reaffirm to investors that the Fed is one step closer to normalizing monetary policy and subsequently, increase confidence in the Greenback.

Looking at the technicals on the Daily timeframe, the EURUSD continues to be traded in a bearish channel. We can also see that the pair has entered a consolidation period, with resistance around 1.2960 currently preventing this pair from entering 1.30. For the pair to reach 1.30 once again, it is possible that we will either require the German ZEW Survey to show that German data is returning to some sort of consistency, or a surprisingly dovish FOMC statement on Wednesday evening.

Support can presently be found at 1.2891, alongside the current yearly low, 1.2858.

Upcoming Scottish referendum dominates headlines

The upcoming Scotland referendum completely dominated UK economic headlines last week, with the GBPUSD falling to its lowest level since November 2013 (1.6051) when the prospect of an independent Scotland continued to gain unexpected momentum at the beginning of the week.

From here, comments from Bank of England (BoE) Governor Carney that an interest rate hike can be expected around Spring 2015, alongside “NO”votes for Scottish independence regaining the lead, encouraged the Cable to recover losses.

The Scottish referendum occurs this Thursday and with such a period of political uncertainty uncommon for the UK, this pair should continue to move unpredictably over the next few days.

If “NO”votes win the majority, the GBPUSD has the potential to move back to the 1.66 area. This is where the pair was trading before the“YES”vote began to be priced into markets. However, if “YES”wins and Scotland becomes independent from the UK, it will be difficult to forecast what could happen to the pair. Downside pressure should accelerate, with it even possible the Cable could depreciate by a sudden 10%.

From a technical standpoint on the Daily timeframe, the GBPUSD has surprisingly re-entered the bearish channel which looked certain to have concluded only a week ago. With the Scottish referendum now only days away, this pair is expected to continue trading with high volatility.

Potential resistance can be found at 1.6350 and 1.6441, while support is located around 1.6190 and the current yearly low, 1.6051.

USDJPY buying pressure now looking to slow down

At the beginning of last week, comments from Koichi Hamada (an advisor to Prime Minister Shinzo Abe) that a weak JPY was “positive for Japan’s economy”allowed investors to price in future stimulus from the Bank of Japan (BoJ).  This encouraged widespread JPY weakness and the USDJPY reached its highest valuation since September 2008.

However, comments from BoJ Governor Kuroda on Friday morning that although the central bank is prepared to add stimulus if necessary there are no plans presently to do so, cooled buying pressure down as the week concluded. Next week sees a high quantity of economic data released from both Japan and the United States and as such, the USDJPY should experience volatility.

From Japan, the latest Japanese Trade Balance is released on Wednesday with Machine Tool Orders on Thursday and Tokyo Department Sales on Friday morning. In regards to the Unites States, the latest Industrial and Manufacturing Production data is released on Monday. This is followed by CPI (Inflation) and the latest Federal Reserve FOMC Decision on Wednesday evening.

From a technical standpoint on a Daily timeframe, a bullish trendline remains in control of the pair but both the RSI and Stochastic Oscillator are now located inside the overbought boundaries. This suggests the pair could be about to experience a pullback. In which case, potential support can be found at 106.810 and 106.191.

The downside break the RBA have been waiting for

The Aussie moved dramatically to the downside last week (around 400 pips) with the Reserve Bank of Australia (RBA) finally being provided with a weaker currency, after stating for some time that the Aussie was “overvalued”.

Investors reacted negatively to Business Confidence not meeting expectations, with the following evening’s news that Westpac Consumer Confidence had unexpectedly declined encouraging further profit taking. From here, an unusual employment report suggesting that Australia had added nearly 10 times the expected number of jobs to its economy was met with confusion from investors.

As the week concluded, breaking news that the Australian Security Intelligence Organisation (ASIO) had raised Australia’s terror alert level to “high” encouraged additional bearish movement. Over the weekend, Tony Abbot, Australian Prime Minister, formally committed to providing Australian military assets to an international coalition against ISIS, which subsequently led to the AUDUSD declining to 0.89 for the first time since March.

The technicals on the Daily timeframe suggest the pair is currently withstanding heavy bearish pressure, with further support located at 0.8966. If the pair is going to attempt to recover sudden losses, resistance can be found at 0.9018.

*Ahmad is chief market analyst at FXTM.