Egyptian riots dent risk appetite

Concerns over tensions in the Middle East

Riots in Egypt motivated by high unemployment and inflation and an authoritarian government have dominated news headlines this week - civilian protests escalated to a ‘Million Man March’ on Tuesday of this week. Egyptian riots come just after a similar situation materialized in Tunisia, and investors are asking themselves is if the problem will keep escalating in Egypt or if another country will soon follow this trend?

Last Friday the EUR/USD currency pair dived to lows of 1.3583 after having reached highs of 1.3746, the sudden strengthening of the US Dollar was mostly attributed to concerns over the Egyptian situation that caused money flows to the traditional safe haven currencies. However other factors also helped garner support for the US Dollar. Data released Friday from the United States was on the whole relatively positive, or at least not negative; GDP advanced was by and large in line with expectations at 3.2 percent against an expected 3.5 percent (and most importantly better than the previous 2.6 percent) even the Michigan Consumer sentiment index was better than expected at 74.2 against the expected 73.2.

Tensions over Egypt also pushed the price of Gold higher, last Friday the precious metal rallied from around 1311.70 to day’s high of 1347.20 in a couple of hours. Early this week support for the precious metal eased initially but was mostly trading sideways. Uncertainty in the Middle East has dented Risk appetite but apparently has not extinguished it.

Speculation of ECB hiking rates sooner resurfaces

A higher year on year estimate for Euro Zone inflation released last Monday came out at 2.4 percent. The figure was slightly higher than expected and higher than the previous 2.2 percent. The data revived recent speculation that the ECB might have to raise rates sooner than the Federal Reserve. On release of the data the EUR/USD currency pair pushed higher and the Euro managed to pair losses made Friday evening.

Data for Euro Zone unemployment rate, inched lower to 10.0 percent from a previous 10.1 percent, this helped to keep support alive for the single currency. The Bullish trend for the EUR/USD pair continued and tested resistance around the 1.3760/70 region when it hit highs of 1.3775. Visible on daily and four hourly charts we see that the currency pair has been bound within a channel formed by significant support at around the 1.3570 region and significant resistance at 1.3760/70 region since 21st January on the forex market.

Good PMI Manufacturing print for the United Kingdom

PMI data coming out earlier this week from the United Kingdom was rather positive; with PMI manufacturing at 62.0 (vs. 57.9 expected and 58.3 previous). The figure was supportive for the British pound as it gained a total of around 1.35 percent against the other major counterparts on day, prior to US open. As most of the gains were made against the US Dollar the gains registered by British Pound were also a result of the softer US Dollar.

This helped resurface previous speculation that BoE would be hiking rates sooner than expected. For the former part of the forex week the GBP was up 1.57 percent against the USD and up 0.50 percent against the Euro.

For the week, RTFX Trader Tip EUR/GBP sees resistance for the upside at 0.8670/0.8761 and to the downside sees support at 0.8491/0.8402 – the pair is currently trading 0.8541 at the time of writing.

The Yen continues to strengthen despite last week’s downgrade for Japan

The Japanese Yen continued to strengthen against the US Dollar. The USD/JPY had shot up late last week when Standard and Poor’s downgraded Japan on the grounds that there was no “coherent strategy” to try to harness the debt situation however JPY losses did not last too long. On the news the USD/JPY currency pair jumped from 82.18 to 83.21 in less than 30 minutes. At the time of writing the pair is trading at 81.59 down 0.65 percent from week’s open.

RBA keeps policy rates unchanged, flood impact only temporary

The Aussie reclaimed parity against the US Dollar on Tuesday helped by the rising commodity prices and improving global economic growth. Earlier Tuesday morning the RBA kept its policy rate unchanged at 4.75 percent and signaled no changes in what it was expecting for the future. The RBA also played down the impact of the recent floods and said that damage and effect on the economy were only expected to be temporary. For the former part of this week the AUD/USD has traded in the range of 0.9867-1.0077 up to the time of writing and from year’s open the Aussie is down 1.35 percent against the greenback.

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FX Technical Key points

EUR/USD is Neutral. EUR/GBP is neutral. USD/JPY is Neutral. GBP/USD is neutral. USD/CHF is Bearish, target 0.9200, key reversal point 1.0000. AUD/USD is Bullish, target 1.0300, key reversal point 0.9500. NZD/USD is Neutral.

This article has been prepared by Rudolf Muscat, Senior Trader at RTFX Ltd.