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Draghi’s therapy works – FX & Gold – weekly outlook – February 4-8

February 4, 2013

In the foreign exchange market, euro maintained its domination to make gains for yet another week, which is well supported by European Central Bank President Mario Draghi’s therapy, as the region’s economy is also showing signs of recovery, with Germany providing a major boost that led to investor confidence, helping funds flow back to the Eurozone region.

Japanese yen kept on losing its weight, as it has lost its heavenly status and is unable to make a comeback due to a major shift in fiscal and monetary policy stance. Pound sterling, which is already suffering from a weak domestic economic condition, got a further blow on UK PM David Cameron’s EU referendum announcement. Aussies made an upside attempt, but could not gather momentum due to weak economic conditions at home and fear of a further rate cut in the pipeline.

Though last week’s US job data was not as per expectations, as it created fewer jobs and unemployment rate edged higher to 7.9 percent from 7.8 percent, but an upward revision in 2012 job data indicating the creation of 335,000 more jobs. That mostly happened in the last quarter is a healthy sign, nevertheless. It gives a fresh impetus to the economy, which could also mean a good start to the New Year because spending indicators are positive, which means consumer sector is already doing fine.

The Fed has a target of 6.5 percent unemployment rate and a lot of distortion in data was caused by bad weather and fiscal cliff issue in the last quarter. This is why the Fed in response to recently-released economic data, opted for a cautious policy stance and did not talk much on subject.

From now onwards, market will be more focused on growth and data. Major events due this week will be Euro-zones producer price index on Monday that will help determine the domestic price change of commodities. It will be followed by US factory orders.

On Tuesday, PMI data will give a growth picture in China, but market will be more focused on the Reserve Bank of Australia’s decision on interest rates. Later in the US, Institute of Supply Management data will give an analysis on growth prospects in non-manufacturing sector.

Wednesday will be a quiet day in terms of data release, as few European data will be released which will have hardly any impact on the market.

Overall, Thursday will be the most exciting day of the week as Australia will announce its unemployment rate. Then few hours later, the UK will be releasing the details of quite a few economic indicators, but all eyes will be on its monetary policy announcement. Market will watch if the Bank of England is willing to increase its Asset Purchase Facility from current GBP 375 billion, as its economy continues to struggle. The same day, the ECB will announce its monetary policy that is expected to be followed by a press conference. Simultaneously, all eyes will be on the initial US jobless, numbers which is an important economic indicator.

Friday too will be a busy day in terms of economic data as a barrage of data will be released from China, Germany, Switzerland and Italy. The US trade balance will be the last important announcement of data of the week.

GOLD @ $1666.80 = There is no change in my view and a bias for gold remains on the downside, as yellow metal is obviously struggling to make gains. Gold is not responding to Fed’s continued easing policy and a constant liquidity injection by the BOJ.

The other major factors are that after easing of European financial unrest and settlement of US ‘fiscal cliff’, gold has lost its heavenly status, which is costly to hold. Central bank’s buying of gold does not look too aggressive, as a shift could have been towards Foreign Exchange Reserves after somewhat global economic stability. Results of India hiking import duty on gold has led to a fall in commodity’s demand.

It is interesting to note that despite China’s New Year celebrations on February 10, gold failed to attract buyers. India and China are the two major gold buyers and this has increased the probability of a sharp fall in gold prices.

In medium-term, gold has to penetrate $1740-50 barrier for more gains. However, in short-term, $1690 remains the challenging target that needs to be cleared. I favour a down move and a break of $1645 is required for a test of $1625-30 zones;

EURO @ 1.3639 = The up move did occur, but it extended well beyond the target. A bullish sentiment will prevail as long as euro is preferred on any corrective move. Strong support is at 1.3450, which may not be tested, as the European currency will find buyers around 1.3520-50 zones for the next upside target of 1.3795, which is another strong resistance point and only a break would increase the possibility of a test of 1.3940 levels. Range for the week: 1.3450-1.3940;

GBP @ 1.5690 = Extreme caution is required for a further Pound selling. Next support line is at 1.5610, which may not be easy to crack, but still needs to push beyond 1.5885 to regain lost confidence and a move above 1.5950 will break the spell, or else 1.5520. Range for the week: 1.5520-1.5980;

JPY @ 92.80 = I do not see any respite for Yen as the currency will be gripped by correction. Yen should ease from 91.20-40 zones that will only be possible on a break of 91.70-80 zones. A push above 93.40 will encourage for 94.35 or else a deeper correction could see 90.50. Range for the week: 90.40-94.50;

AUD @ 1.0405 = Only a break of 1.0480 will encourage for a move towards 1.0550, which is a possibility. Aussie will struggle to recover if falls below 1.0340 and could test at 1.0250-75 levels. Range for the week: 1.0240-1.0570.

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