Is GBP/USD Due for a Recovery?

Is GBP/USD Due for a Recovery?

Chart Of The Day

Fundamentals

Thirteen trading days have now past without a meaning rally in the GBP/USD. This is the longest stretch of weakness that we have seen in sterling since August 2008. The currency pair has obviously become deeply oversold and now everyone is wondering if GBP/USD is due for a recovery. From a fundamental perspective, we think further losses are likely because next week’s U.K. economic reports should reinforce the weakness that kicked off the decline in the currency. U.K. data took a turn for the worse in mid July prompting the Bank of England to tone down their hawkishness and speculators to abandon their long positions, which hit 7-year highs on July 1st. According to the latest CFTC data, long sterling positions have been cut by 55% so with how deeply oversold the currency pair has become we would be surprised if there were no recovery. However the magnitude may be small given the shift in monetary policy expectations and economic backdrop of the currency.

Technicals

On a technical basis, all of the oscillators show that GBP/USD is deeply oversold but with Friday’s decline, the currency pair also closed below the 100-day SMA for the first time since August 2013. This signals the possibility of further losses with the next level of support at 1.6630, the 23.6% Fibonacci retracement of the July 2013 to July 2014 rally. A move back above 1.70 would be needed to negate the downtrend in GBP/USD.

AUD/JPY Recovery Limited to 95?

AUD/JPY Recovery Limited to 95?

Chart Of The Day

Fundamentals

For the past 5 trading days, AUD/JPY has been slowly creeping higher but if gold prices, which declined 2% today continue to fall, it may be difficult for the currency pair to sustain its gains. In fact, the recovery in AUD/JPY could be limited to 95 if gold prices do not rebound. Over the past month, we have seen signs of new strains on Australia’s economy and based on the trend of recent economic reports the odds favor a decline in leading indicators for the month of April. Don’t expect the currency pair to receive much support from USD/JPY. The recent price action of currencies, equities and Treasuries suggests that investors appear to be betting that the Federal Reserve will be wrong in that interest rates will not rise as quickly as they anticipate. While the central bank has not specified exactly when the first rate hike will be, according to their official forecasts, the main interest rate is expected to reach 1% by the end of 2015. In no way is this an aggressive forecast but investors believe the central bank will be even more cautious as Quantitative Easing draws to close. The market is pricing in only about 50bp of tightening by the end of next year, which explains why even with today’s mild dollar rally, the greenback’s gains have been limited. In fact, bond investors were not impressed by the surprise increase in durable goods, rise in house prices, acceleration in service sector activity or the improvement in consumer confidence as prices increased and yields continued to fall. A lot of U.S. data was released today and their positive reads were encouraging but ultimately, the impact of the markets will be limited because they won’t make the central bank any more eager to increase interest rates.

Technicals

Taking a look at the daily chart of AUD/JPY, the currency pair has risen out of the sell zone according to our Double Bollinger Bands. While this signals a potential turn in the currency pair, there is stiff resistance below 95.25. If AUD/JPY drops back below 94, the currency pair could take a stab at its 1 month low near 93.

Key Recovery Levels in FX Forex Daily Technicals 4.17.13

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