'1.2400 might be an area to take profit on EURUSD shorts' - Christopher Vecchio, DailyFX

Christopher
Vecchio

PROFILE:
• Current Job:  Currency Analyst for DailyFX.com in New York.
• Career: dual Bachelor of Arts degree in Government & Law and Economics from Lafayette College.

View profile at FXStreet

Christopher Vecchio is a currency analyst for DailyFX.com. With a background in political science and law, he focuses on the interrelationships between geopolitical events, macroeconomic trends, and market reactions. Also an active trader, Christopher monitors the markets around the clock.

Do you see the BoE making any market-moving announcements at the monetary policy meeting this week?

The BoE is still a few months away from moving to a rate hike, and in context of the recent issues in the UK housing sector, it would make sense that the BoE remains on hold at present time. The concern isn’t so much that there is an issue now in the housing sector, but that one may be developing and premature rate hikes could lead to an intended acceleration of credit issues. If anything, the weakness of the Pound in the days and weeks after the Scottish referendum despite the BoE’s purported hawkish posture should serve as a warning sign to traders that there may be other influences evolving in the background.

Data released on Tuesday showed that Eurozone's inflation eased further in September. What could make it accelerate and when could that happen in your opinion?

The weaker Euro should start to have an impact; it takes around six months for FX rates and changes in interest rates to flow through to the real economy. Accordingly, with EURUSD having peaked in May, we’re probably going to be in the trough of inflation over the next few months; CPI should start to see the benefit from a weaker Euro in Q1’15. If energy prices rebound – currently a -2.5% weight on headline yearly inflation – that too would serve as boost. Perhaps a lingering Russian-Ukrainian crisis without the gas issues resolved headed into the winter months would be a proper catalyst.

How do you expect the situation in Hong Kong to develop? Could lasting turmoil seriously damage Hong Kong's economy?

At this point in time there is little reason to believe that the protests in Hong Kong will develop beyond that.

USD/JPY finally reached a milestone at 110.00 what are your further targets? 

¥110.00 was my end of September/Q3 target (missed, but achieved a day later on October 1), but recent technical developments suggest the slowdown in the rally between ¥108-110 may be the result of a flag forming. As long as price holds ¥108.25 to the downside on a weekly basis, there may be room for continuation towards ¥112.00 in October.

The EUR/USD is extending its decline and now pair is near of 1.2500, do you see the pair falling to 1.2000 in the near term? Targets? 

$1.2400 is of interest to me for several reasons. Fundamentally, the ECB has its 2016 economic projections based on a EURUSD exchange rate of $1.2400, so I imagine that market participants who have been short from above $1.3000 may find interest in that level as an area to take profit. (And then look for a short covering rally with COT speculators still rather large, before shorting the market again.) Yield differentials continue to widen (US-Germany 10yr at widest spread since 1999) in favor of the US, and with the Fed putting forward more aggressive dot plots recently (the pace of rate hikes has accelerated), yield differentials should remain in the US Dollar’s favor. Technically, we saw $1.2400 act as both initial support and initial resistance on tests from above and below, respectively, from May to August 2012.

The NZD/USD lost 400 pips in three days to test the 0.7700 key level, do you see the pair falling to the 0.750 area and even 0.7000 level?

A break below the 2013 lows near $0.7680 would be the worst case scenario for the NZDUSD. In the case, it may be a quick trip to the 2012 lows at $0.7648/57.