GBP and AUD Ended Higher in a Week of Consolidative Trading in FX
Movements in the forex markets were relatively limited last week even though broad based strength was seen in both Sterling and Aussie. Both currencies were lifted by employment data from their respective country. Swiss Franc and Canadian dollar ended as the weakest major currencies. Euro was mixed even though ECB president Mario Draghi's speech affirmed the chance of additional stimulus in December. Dollar pared back some of the post NFP gains and turned into consolidation mode. A number of Fed officials spoke but didn't provide new information to the markets. Larger volatility was seen elsewhere, in particular in US equities. The sharp decline in both DJIA and S&P 500 suggested near term trend reversal, probably as investors got more convinced that Fed will raise interest rates in December.
The sharp fall in DJIA and the breach of 55 days EMA suggests that rebound from 15370.33 has completed at 17977.84, ahead of historical high of 18351.36. The fall from 17977.84 is seen as part of a medium term consolidation pattern and would likely extend to 61.8% retracement of 15370.33 to 17977.84 at 16366.39 and below. As we're treating price actions from 18351.36 as a sideway pattern, we'd expect strong support from 38.2% retracement of 10404.49 to 18351.36 at 15315.65 and bring rebound.
The dollar index edged higher to 99.50 last week but turned sideway since then. The index might engage in more consolidative trading in near term. But near term outlook will stay bullish as long as 97.81 resistance turned support holds. Overall, the consolidation pattern from 100.39 should have completed at 92.62 already and the larger up trend is likely resuming. Current rise should extend for a test on 100.39 first and then long term fibonacci level of 121.02 to 70.69 at 101.79.
Regarding trading strategies, we're sold EUR/USD last week. No change in both fundamental and technical outlook in the pair. ECB president Mario Draghi said that there were "signs of a sustained turnaround in core inflation have somewhat weakened." He also reiterated that the central bank will re-examine its monetary policy at the next meeting on December 3. Weaker than expected GDP growth in Eurozone also add justifications to the already strong case for ECB to add stimulus in December. And there are speculations that ECB would opt for another cut in the deposit rate, or probably expand the size of the QE program.
Meanwhile, New York Fed president William Dudley, an influential FOMC voter, said the current 5% unemployment rate "could fall to an unsustainably low level" that threatens inflation. And the seven years of near-zero interest rates "may be distorting financial markets." Fed Vice chair Stanley Fischer said he expected "while the dollar's appreciation and foreign weakness have been a sizable shock, the U.S. economy appears to be weathering them reasonably well." In spite of weaker than expected retail sales, Fed fund futures are still pricing in 66% chance of a December hike, down slightly from prior week's 70%.
Diverging policy path should continue to weigh on EUR/USD. Technically, we're holding on to the view that price actions from 1.0673 is merely a brief consolidation. fall from 1.1713 should extend to retest 1.0461 low and there is chance for a break there to extend the larger down trend. Hence, we'll stay short in EUR/USD for the moment