Sentiments on the US economy were hardly brightened through the last week following mixed data releases. Stocks declined in the beginning of the week after reports showing consumer confidence decreased the most since 2005 and the Housing Price Index had the deepest drop in five years. Last week’s Core PCE Price Index was also released below expectations at 0.1%. On the positive side, Personal Spending was released inline with expectations and US Factory Orders came in just above expectations at 3.7%. However, most of the last week’s attention was concentrated on the Federal Reserve’s Bernanke and Bush’s speeches on the Sub Prime issue.
On Friday, Ben Bernanke said that the Fed “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.” Bernanke’s statement was followed by President Bush’s call on the Federal Housing and the Congress to initiate reforms to help troubled borrowers rework their loans.
In fact, Bernanke offered little new guidance on the outcome of a Fed policy meeting in September. People are trying to evaluate what is going to be the extent of the overall problem with mortgages while expecting The Federal Open Market Committee to cut the rate at its September meeting.
This week will be quite light on market moving news from the US and today the U.S markets will be closed due to the Labor Day Holiday. The ISM Manufacturing index will be released on Tuesday followed by the Unemployment Claims, Non farm Employment Change and the Unemployment Rate later this week. Investors, returning from summer vacation, will be watching closely for any further deterioration in the housing and consumer markets.
As opposed to those in the U.S, European stocks rose throughout last week on speculation that global economic growth will withstand the US housing crisis. On Friday, the EUR traded around session lows against the USD at 1.3623.
Four central banks including the ECB are expected to meet this week and announce their Interest Rates decisions. The Australian dollar, Canadian dollar, Euro, and the British Pound could all be the subject of increased volatility as investors still don’t know how strongly the economy may be affected by the U.S. housing market.
Apart from that, the fundamental issues will dominate European markets over the course of this week. British Manufacturing PMI is expected to release today at 55.1, just a slight drop from the last figure of 55.7. Thursday, September the 6th will be the “all European” day with major events like the BOE and the ECB Interest Rate Statements and the ECB President Trichet Speech. The ECB will probably keep its benchmark refinancing rate at 4%. We should expect the European market to draw much attention this week.
The JPY has appreciated over the past two months as losses in U.S. sub-prime mortgages have triggered risk aversion and carry trades unwind. The JPY traded at 115.84 per USD on last Friday after rising 3.8% in July. There are only two fundamental events that could possibly initiate a strong move by the Japanese Yen: a rate hike by the BOJ or a jump in Japanese inflation - neither of which are expected this week, therefore carry trades unwind and U.S sub prime issue will remain the main drivers of the JPY strength. This week’s calendar will provide almost no news from the Japanese markets except today’s Monetary Base index which measures the value of all currency and liquid cash assets held by the public. There are no expectations for this indicator, while at the same time the previous month’s figure stood at -2.3%. Later this week, the Machine Tool Orders and the Leading Index, both of a minor importance, are also expected to come from Japan. Regardless, the USD/JPY price action will likely remain contingent upon risk aversion trends, and now that Fed Chairman has assured investors that he will support the markets in times of distress, carry trades and equities might resume their gains this week.
The pair is trading between the 50% and the 61.8 Fibonacci level of the 1.3850/1.3359 move. Both levels are now key support and resistance, and every breach through one of them will validate the move. The slow stochastic indicates that the momentum is slightly bullish, and the first break might be through the upper level of 1.3662.
The cable is in the middle of an uptrend that was initiated at 1.9650 and is now at a local consolidation at 2.0166. The slow stochastic and RSI indicate that there is still more room to run, and the next target price might be 2.0200.
The pair is heading to 116.37 which is the 38.2% Fibonacci level of the 124.00/111.63 move. The trend is up and oscillators on the daily and on the hourly charts are supporting the bullish notion. A break through 116.37 will validate the next move and set the next target price to 117.00.
The daily chart is showing a mild bullish configuration as the pair floats around 1.2060 which is a key resistance level. A break though that level will validate the bullish momentum and establish the next target price at 1.2120. The hourlies give a slight bearish signal which indicates that buying on dips might be preferable today.
The Wild Card
There is a very distinct upward channel forming on the 4 hour chart as the pair now floats around the bottom of it. Both the slow stochastic and the RSI show positive momentum which provides forex traders with a great opportunity to enter a long position at a very good price.