Eurodollar bears continue to dominate, Gold drops below $1200

EURUSD – Bears continue to control

Despite the European Central Bank (ECB) leaving monetary policy unchanged last month, the Eurodollar declined by a further 200 pips last week with a continuation of poor economic data inspiring downside movement. Not only did this this include EU CPI (inflation) falling to a near 5-year low in September, but German economic data also continued its run of poor form. An unexpected manufacturing contraction has raised an emergence of fears that the German economy might contract again in Q3.

Economic data from the European Union is lower in quantity this week, so we can’t rule out a consolidation of losses or recovery period after a few weeks of heavy selling. Whether the pair can recover substantial losses would be dependent on the market reaction to Wednesday’s FOMC Minutes. If there is an unexpected hint regarding a potential timeframe for a US rate rise, Greenback strength would allow the Eurodollar to continue moving lower in valuation.

Looking at the technicals on the Daily timeframe, the EURUSD has found itself back inside its bearish channel after a false breakout lower. This would provide room for a consolidation period, before the next leg lower. Resistance found at 1.2675 and 1.27 could prevent the EURUSD from trading above 1.27, while support can be found at 1.2572 and 1.2509.

GBPUSD – Unexpected downside movement

The Cable was the unexpected loser of the week, declining by over 200 pips and dropping below 1.60 for the first time since November 2013. Economic news started brightly, with UK GDP being revised upwards and leading to further pressure being put on the Bank of England (BoE) for a rate hike.

However, the cable took an unexpected bearish turn when the UK Manufacturing PMI missed expectations due to EU economic problems limiting demand for UK products. This provided investors with their first real indications that EU economic woes have a detrimental impact on UK economic growth and weakened investor attraction towards the GBP substantially. On Friday, Chancellor George Osborne made headlines for expressing that EU economic problems pose the largest threat to the UK economy.

This week, the BoE are largely expected to leave monetary policy completely unchanged on Thursday. Perhaps the largest risk to the GBPUSD valuation will come from Tuesday’s Manufacturing and Industrial Production data. If investors receive any more signals that EU economic issues are impacting UK sector growth, expect the bears to be alerted.

From a technical standpoint on the Daily timeframe, this pair looks bearish and has found itself gradually sliding through the bearish channel formed in August. Resistance can be found at 1.6051 and 1.6097, while support is located at the current 2014 low 1.5951. A downside break below the November 4th low of 1.5906 would open the doors for the GBPUSD to trade below 1.59 for the first time in over a year.

Aussie volatility continues

The Aussie seemed to lack direction last week, with the pair caught alternating between the bulls and the bears attempting to take control. Overall, the Greenback strength (USD) after the US employment report gave control to the bears, and sent the Aussie to its lowest valuation (0.8642) since July 2010.

Movement in the pair is likely again this week, with a high quantity of economic releases scheduled from Australia. This includes the latest Reserve Bank of Australia (RBA) interest rate decision, Inflation expectations, as well as an Australian employment report. With the exception of the latest FOMC minutes, US economic news is light, therefore where the Aussie moves will likely be dependent on the reaction to Australian news.

It remains no hidden secret that the RBA feels the Aussie is overvalued and would prefer the AUD to be weakened. It will be interesting to see if Governor Stevens adopts the same approach as Reserve Bank of New Zealand (RBNZ) Governor Wheeler did last week, and threatens currency intervention to send the AUD lower.

The technicals on the Daily timeframe shows that the pair remains caught inside a bearish channel. The USD continuing to strengthen against its counterparts increases the chances that the Aussie will continue to slide down the channel throughout October with gains limited by the upper trendline. Resistance can be found at 0.8747 and 0.8764, while support is located at 0.8699, 0.6662 and the current 2014 low, 0.8642.

Gold finally breaks below $1200

In line with expectations, Gold traded narrowly throughout the week until Friday’s US employment report. The NFP came in much stronger than forecast and led to heightened suspicions that the Federal Reserve will look to raise interest rates sooner than expected. As such, Gold concluded trading on Friday below $1200 for the first time since the 19th December 2013.

Despite fears residing over an economic slowdown in China, political unrest in Hong Kong and an international coalition against the Islamic State, Gold seems to only be trading in accordance with US economic news. Therefore, investors interested in Gold should monitor Wednesday’s FOMC Minutes closely. Any unexpected hints that the Federal Reserve are internally talking about raising rates would provide more power to the bears.

Other than the FOMC Minutes, economic releases from the United States are low this week but the commodity still looks on track to reach the 2013 low ($1180.32) by the time the Federal Reserve concludes Quantitative Easing (QE) at the end of October.

*Ahmad is chief market analyst at FXTM.