Currency markets saw some of the biggest moves in the previous session with weakness in the Japanese Yen showing some of the most activity and USD/JPY and EUR/JPY in particular marching higher. Some selling pressure was initiated by Japanese export companies in an attempt to slow the rises but the bull side won out with both pairs posting new highs for the week. Part of the explanation for these moves is being attributed to the upcoming Federal Reserve meeting, where a dovish bias is expected by many (a net positive for equity markets and high yielding currencies).
Macro data yesterday showed that the Trade Balance in Japan moved into negative territory (creating the first deficit recording since 1980) and this is also adding to the selling pressure in the JPY. The main driver in the USD/JPY will be the Federal Reserve meeting, where markets will look to assess the FOMC’s latest interest rate forecasts. We are likely to get a long term projection from the Fed (inline with trends from recent months) and any suggestion that interest rates will remain low will likely initiate a rally in global stock markets.
A press conference from Fed Chairman Bernanke will follow the rate decision and most of the questioning from the attendant journalists will likely center on the possibility of additional quantitative easing stimulus for the US economy. While it is unlikely that there will be any direct suggestion of a third round of QE, the Eurozone debt crisis will likely be enough of a reason to leave all possibilities open. Any hint of stimulus, however, would be a market positive, especially for private banking stocks.
Overnight, we did see some inflation data out of Australia, with the Consumer Price Index (CPI) showing a higher core reading, helping propel this week’s rally in the Australian Dollar. In the Eurozone, flash PMI data came in higher than market estimates at 50.4 for January (against estimates for 48.5 and 48.3 previously). The data is encouraging for the region, as it shows that economic activity is showing signs of stabilizing. All sub-components of the report showed strength, with manufacturing, employment and business expectations all pointing higher.
Looking ahead, the next main macro release will be the UK GDP figures and the minutes from the latest Bank of England (BoE) monetary policy meeting. The BoE minutes are expected to show a unanimous decision to make no changes to its asset purchase program and to leave interest rates on hold. QE possibilities are another area to watch in the release, and any dissenting votes will likely weigh on the British Pound, particularly against the US Dollar.
The EUR/JPY is mounting an impressive rally on the hourly charts, so we will pull out to the dailies to see how much longer this trend can continue. Fibonacci resistance levels are matching well with historical and moving average resistance levels, and the first level to watch comes in at the 38.2% retracement of the decline from above 110, and we expect prices to be contained into this area into the end of the week. Short term sells can be taken here but a daily close above this level would be a bullish long term event.
The S&P 500 is starting to have some difficulty with the 1315 area and prices are now starting to roll over, creating a double top in this region. We are expecting a period of consolidation at this stage, with prices needing to see a drift back to at least 1300 before making another run higher. If prices to fall through 1300, expect a drift back to 1285, which is an acceptable buy entry for short term positions.