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Volatility expected ahead of central bank and NFP announcements

04 February, 2014

Investor sentiment opened low again this week with the market depressed by new data from China showing further weakening in the local economy. Risk appetite is waning across the board as a result of concerns that China’s economy is losing momentum and with emerging economies under pressure after the US Federal Reserve’s decision to continue to reduce the economic stimulus. Emerging markets are continuing to be hampered by the exodus of funds as investors move money back to the developed markets, something which has caused the likes of the Turkish lira, Argentinian peso and the South African rand to be thrown into turmoil. It is also a big week for fundamental traders with the most influential data announcement, the Non-Farm Payrolls (NFP) released on Friday, as well as three central bank meetings.

Investors will be closely looking to the NFP announcement to assess just how well the US economy is recovering and to see whether the unemployment rate is closer to the all-important target of 7 percent. Former Fed Chairman Ben Bernanke has been saying for months that a drop in the unemployment rate is critical to the long-term recovery of the nation and, should that symbolic level be reached, it would likely substantially improve confidence in the US recovery. If the NFP number is higher than expected, we can expect to see bullish behaviour from the USD, and likewise, if the number disappoints, we expect USD to weaken.

Whether the NFP data is positive or not, investors should closely watch the outcome for opportunities to take advantage of strong movements in either direction. The USD has started the week strengthening against the euro and the British pound, and further volatility in EUR/USD is expected when the European Central Bank (ECB) meets on Thursday and ECB President Mario Draghi outlines the Eurozone’s monetary policy. The euro is under pressure with disappointing inflation data on Friday and very few signs that the Eurozone is rebounding from the financial crisis. Analysts have changed their forecasts recently and many are now predicting Draghi will announce a further reduction in interest rates from the historic low of 0.25 percent to 0.1 percent. If this announcement is confirmed on Thursday, it is likely we will see substantial movement in EUR/USD. The EUR/USD pivot point is 1.3487, with resistance lines at 1.3492, 1.3497 and 1.3502, and supports at 1.3482, 1.3477 and 1.3472.

The GBP has also shown some weakness early in the week with investors pricing in a possible interest rate hike announcement from the Bank of England as early as this month. The BoE will announce their policy strategy on Thursday and, with the UK economy continuing to grow, the market will be closely tuning in to the associated press conference to learn which direction Governor Carney is intending to take the UK’s monetary policy in. Any change to interest rates in the UK could generate substantial volatility in GBP pairs, particularly GBP/USD and EUR/GBP. The GBP/USD pivot point is 1.6433, resistance levels are 1.6445, 1.6453 and 1.6465, support levels are 1.6425, 1.6413 and 1.6405.

Yen is near two month highs against the USD with declines in the EUR and the sell-off of emerging economies' currencies boosting its attractiveness as a safe haven investment. The yen was also supported on Friday by new data that showed the core rate of inflation in Japan was 1.3 percent, the highest level in five years. The pivot point for USD/JPY is 102.15, with resistance levels at 102.33, 102.42 and 102.60; and supports at 102.06, 101.88 and 101.79.

Meanwhile, the Australian dollar is struggling, closing on almost a three year low against the US dollar. AUD traders should closely watch Tuesday’s interest rate decision announcement by the Reserve Bank of Australia where a possible rate cut is possible. The AUD/USD pivot point is 0.8757, with resistance levels at 0.8765, 0.8776 and 0.8784; and supports at 0.8746, 0.8738 and 0.8727.

What to Watch this Week: It’s an exciting week for traders with three central bank announcements and the NFP release. Traders should focus on these announcements and particularly look to USD pairs on Friday around the NFP release. EUR/USD could also be an interesting pair to trade on Thursday when Draghi gives his press conference following the ECB policy meeting.

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