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FX and Gold – weekly outlook – January 21-25

January 21, 2013

Data released last week gave a mixed signal about global economic recovery. There could be some optimism due to growth reversal in China and positive signs in the US housing sector, but the World Bank does not see a near-term global recovery due to weak economic conditions in developed economies where growth forecast have been downgraded by 0.6 percent to 2.4 percent.
ECB President Mario Draghi has already indicated that European economy will struggle in year 2013. His pessimism is quite plausible because he is well aware that Euro-zone’s manufacturing sector growth is not steady and unlikely to pick up. You do not expect suffering economies with exceptionally high unemployment rate to rebound when fiscal lending is made conditional that only seeks reduction of deficit by applying austerity measures.
How can the economy grow, when the purpose of liquidity injection in trillions in the name of quantitative easing is to meet banks’ capital requirements and debt financing at the cheapest rate and only a tiny amount is allocated for growth in private sector? Point to note is that unless money is provided to new businesses economy will never grow in real sense.
Meanwhile, this week’s economic events will once again dominate the market. On Monday, US market will remain closed on account of Martin Luther King’s birthday, but German producer price index, which is the indicator of commodity inflation, could set a tone, as Germany is considered the growth engine of Europe.
On Tuesday, BOJ will take a decision on monetary policy, but the press conference after the interest rate decision will be watched keenly for a clear direction. In European session, the release of German ZEW economic sentiment that reflects institutional investors’ viewpoint will provide more clues about the economy. Later, market will be watching US existing home sales data, which could continue to surge due to a growing demand for houses. A drop in housing sales will disappoint market.
On Wednesday, the focus will be the UK announcements, as market will try to pick some positive points from the release of the Bank of England minutes; unemployment data too will be keenly followed as pound Sterling is under stress due to combination of negative factors.
On Thursday, the day will start with Japanese and Chinese PMI data, to be followed by Eurozone PMI release that consists of large part of GDP, but focus will shift towards Initial jobless claim to be released by the US Department of Labour that determines the number of people claiming insurance for being unemployed. It is a barometer that provides the feel about the job market. Higher claims means fewer jobs and weak economy, but lower claims would suggest that the FED’s easing policy is responding well. Last week’s unemployment claims fell sharply by 37.000 to 335.000, which was encouraging news for the market – another week of good data will be cheered by the market players.
Friday should be another busy day in terms of economic data, as Chinese MNI business sentiment indicator will be released, which is based on monthly polls of Chinese business executives that evaluate the economic condition in China. It includes 75 percent of the manufacturing sector. In early Europe, German IFO business climate data will be released. It is an indicator of business environment, as it surveys over 7000 enterprises/institutions that include a short-term business strategy. Though December data showed that business confidence in Germany increased for the second consecutive month, German economy is struggling to make a strong comeback; hence this week’s data will help give a better picture of the economy. Later, the UK will be announcing its GDP data that will provide a broader picture of economic activity and finally last important data of the week will be the number of new home sales in the USA as new homes are purchased at a faster pace, it will include home buyers spending on furnishing and home financing.

GOLD @ $1684.30 = Gold did make gains during the week and rallied upward after the release of better than expected 4th Chinese quarter GDP data. The up move was not sustainable, as it found regular selling interest and could not penetrate beyond $1695 convincingly due a lack of buying support.
Gold purchase dropped by nearly 25 percent in India, as Indians found that solid buyers of physical gold are buying less gold due to increase in import duty. While Chinese economy is on uptick, but they appear less excited about buying gold. Gold could still find buyers on dip as the Chinese New Year will be celebrated on February 10 -11.
I my view, if gold does not climb to January’s new highs in the next two weeks, we could still witness a sharp drop of the yellow metal price, because when the projection for global growth is on the downside, the Central Bank buying will also drop according to the same proportion.
We could be heading for choppy trading in gold, as I am expecting a dip towards $1658-60 zones before making gains. $1698 is the crucial level and only a break here could see a push towards $1712-15 zones, with a strong support line at $1627 and a major resistance around $1735-40 levels;
EURO @ 1.3318 = We could see 1.3240 to act as strong support line and unless 1.3210 surrenders, Euro could make gains towards 1.3425, which is a major resistance level and may not surpass this line for a drop. A break suggests Euro could be heading towards a test and a break of 1.35 levels. Range for the week: 1.3150-1.3520;
GBP @ 1.5870 = A weakness in Pound Sterling is caused by a rift over the UK’s position in the EU. David Cameron could call for referendum and is likely to talk on the subject. This could put pressure on GBP, but any sort of compromising tone could warrant a correction;
Cable has next strong support around 1.5780 and only a break risk for 1.5650, which may not happen, but needs to clear a strong upside barrier of 1.5980 for a possible test of 1.6120. Range for the week: 1.5650-1.6120;
JPY @ 90.07 = As we have surpassed 90 Yen per One-USD, Yen’s fall will lose its pace unless BoJ or the government injects some more life into the US dollar bulls. Next support is at 90.80 and then at 91.40. However, I will prefer to pick the top to buy Japanese currency as its barriers is at 89.40; a break will encourage for 88.35 or 87.50. But profit-taking is suggested as the currency still has the tendency to fall within no time. Range for the week: 87.40-91.50;
AUD @ 1.0509 = Aussie could come under pressure but buying interest will emerge on a dip around 1.0420 or at 1.0375. The currency has the ability to make a comeback if there’s a break at 1.0580 it could still move upwards to test 1.0620 zones. Range for the week: 1.0350-1.0650.

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