Weekly Update – June 29th, 2009

News headlines flooded the markets last week with a series of events, releasing a closely watched interest rate decision and housing data, among other market movers. The major event of the week was the Fed’s interest rate decision, presenting a no-change status, barely affecting the major currency pairs and the stock indices. The S&P500 closed the week barely unchanged, with a loss of 0.25%, presenting a doji like candlestick.

So what went wrong?

In our previous report we mentioned that the Fed’s interest rate decision could have little impact on the market, due to the Fed’s current options. On the 24^th of June, prior to the closing bell of the U.S stock market, the Fed released its decision stating that it intends to keep it interest rates at its current low of 0.25%. As always, the result had an immediate reaction on the intraday session, affecting all the tradable assets, but quickly faded, as a sign of uncertainty continued to linger in the air. On one hand, a combination of improving data and the fact that the Fed intends to lower yields by purchasing $1.25 trillion in mortgage-backed securities and another $300 billion in treasuries relieved traders, helped to prevent a major Dollar selloff. On the other hand, Bernanke’s comments stating that the rate of contraction is now declining weren’t enough to boost confidence and form any major break out.

Despite the lackluster week, which was characterized by consolidation across the board, traders remain optimistic regarding the current economic situation. Carry trades continue to show potential long setups as risk appetite is still increasing, while Dollar counterparts continue to show impressive strength. The Dollar index closed the week, with a minor loss but broke its bullish wedge to the down side. When taking look at the following chart, one can see that the Index has now broken its trading pattern, but is yet to drop below support of 79.958. Please note that the 79.958 support level was taken from the weekly chart and will be closely watched by investors. 

Could the Euro lead the rest of the pairs higher?

As mentioned above most of the currency pairs showed a non-directional week, trading within range. The GBP/USD continued to linger around its recent price level of $1.65, while the AUD/USD finished the week a $0.8076. Despite the lackluster movement across the board the EUR/USD stood out, breaking out of its wedge to form a minor bullish trend. Even though the trend was cut short on Friday, as the pair lost its momentum during the intraday session, this week’s economic calendar could allow the Euro to regain relative strength. On one hand the Euro-zone is scheduled to release a wave of data this week, including its inflation data and a closely watched interest rate decision. On the other hand, the U.S NFP result at the end of the week could subdue this week’s momentum, especially as the number of jobs that are expected to have been shredded during the month of June, could reach a whopping 365k. To date analysts are also expecting an unemployment rate of 9.6%.

Which one will be more of a market mover?

While it is hard to determine which of the three events will have more of an impact on the markets, one must remember that current price patterns are pricing in a double digit unemployment rate in the U.S. If this fact is true, will a 0.2% climb in job losses have any major impact on the various currency pairs, apart from intraday volatility? Recent statements by officials and President Barack Obama all mentioned that the U.S economy is still dealing with contraction that could lead to higher unemployment. If those comments didn’t rattle the markets then, will data now?

When taking a look at the following chart one can see that despite the increasing unemployment rate in the U.S, the EUR/USD has presented a change in trend, now trading in line with the increasing unemployment in the U.S.

 

Conclusion

Even though the Dollar sold off during Friday’s session, upcoming data could present surprising price action. Further Dollar weakness could form break out patterns on all counter parts, especially as a bunch of pairs are now trading around critical levels. In addition the EUR/USD could present high intraday volatility, due to the various market events. Should the EUR/USD follow through and climb to a higher level, it could drag the GBP/USD along with it, despite the negative data from England, especially as the GBP is now trading around major resistance.

Technical Charts

EUR/USD

 GBP/USD

USD/JPY