Central banks continue to dictate markets

Markets have jumped into positive momentum after investors reacted favorably towards the equity markets as the possibility of more QE in Europe from the European Central Bank (ECB) increased following a dovish speech from Mario Draghi late last week and further monetary easing from the People’s Bank of China (PBoC) on Friday. The latest round of monetary easing from China occurred just a couple of days following confirmation of GDP growth falling below the government target at 7%.

With economic momentum supposed to fall even further next year, I highly doubt that we have witnessed the conclusion of monetary easing from China. The PBoC will continue to do whatever it takes to defend growth targets and reinvigorate economic momentum, regardless of whether it comes through further interest rate cuts or gradual depreciation of the Chinese currency.

Although concerns over the health of the global economy remain at the forefront of headlines, if investors are going to remain inspired to purchase equities on the motivation of easier access to money following central bank actions then there is potential for further gains. This is because it is not only the PBoC and ECB who are active in these discussions, but the pressure on the Bank of Japan (BoJ) to unleash further stimulus for its continuously struggling economy is mounting.

The pressure on the BoJ to unveil further stimulus to reinvigorate its economy once more has increased substantially over recent months, with expectations growing particularly after weak trade data last week. This has resulted in JPY weakness, with the USDJPY finally extending above its 200MA on the Daily timeframe that has limited gains in the pair since late August.

The USDJPY surpassing its 200 MA on the daily timeframe is seen as a signal for potential further gains, in the same way that it was pointed out in the USDCHF months ago but last mentioned in August.

Complete contrast in monetary sentiment returns to lift USD

The Dollar received a slightly unexpected vote of confidence after the complete contrast in both monetary and economic sentiment between the United States and everywhere else returned to entice traders back towards the major currency at the end of last week. It is also possible that investors decided to purchase the USD ahead of this Wednesday’s highlyanticipated FOMC decision, with the motivation being that the Fed might shock the markets by carrying out its repeated pledge throughout the past year to begin raising US interest rates in 2015.

I personally think that the Federal Reserve completely missed the boat with an opportunity to begin raising US interest rates during its September policy meeting and that the chances of a US interest rate rise at all this year have weakened each passing week since. The reduced US interest rate expectations are not limited to just slowing US economic momentum, but because the central bank cited global economic weakness as a reason to leave US rates unchanged in September.

Since then, it has been confirmed that economic growth in China has fallen below the government target while economic sentiment in Europe is continually plagued by both low inflation and stagnant growth and concerns remain elevated about the pace of economic recovery in Japan. Under this logic and the statement made by the FOMC in September, it has become very difficult to argue for a US rate rise in 2015.

Regardless of this, the unexpected return of investor confidence towards the Dollar and attraction towards equities following the recent central bank developments have spelt losses for Gold. The Yellow metal dropped by over $20 during trading on Friday, falling from $1179 to as low as $1158.

Euro continues to receive punishment

The Euro has continued to receive aggressive punishment throughout the currency markets after the European Central Bank (ECB) behaved as expected last Thursday and repeated the growing threat of further monetary stimulus while also talking down the bounce in the Euro over the past six months. The Eurodollar has now declined from its monthly high slightly below 1.15 to under 1.10 in less than two weeks.

It was repeatedly highlighted that the jump in the Euro over the past couple of months had nothing at all to do with improved sentiment over the European economy. The only reason for the move to 1.15 in the EURUSD after it looked destined for parity following a decline to 1.04 around April is because US interest rate expectations were repeatedly pushed back.

Can the Eurodollar still hit parity in 2015? It would appear ambitious to still believe so, as for it to occur traders would need both the USD demand to remain consistent and the ECB to throw further QE at its economy in the same way that the Bank of Japan (BoJ) did so this time last year. Moving forward, traders will likely continue to price in Euro declines when economic data from Europe disappoints and increases the chances of further monetary stimulus from the ECB before the end of the year.

GBPUSD hit hard by another rejection at 1.55

The failure of the GBPUSD to close above the mentioned 1.55 level came back to haunt the bulls, and led to an aggressive selloff to conclude trading last week. Although the pair has slipped from breaching 1.55 to 1.52 very suddenly, technical traders on the Daily timeframe will find that the pair has now dropped below the 50,100 and 200 Moving Averages that the GBPUSD has been following strictly for months.

Until we close back above 1.5320, the GPBPUSD still looks technically bearish and vulnerable to further falls. Although a small bounce higher is possible after such a heavy round of selling, technical traders will be looking at the charts and wondering whether they can now begin targeting the 1.51 area which traders found confidence to be a potential “bottom” after multiple touches over the past month.

Looking at upcoming data releases from the UK economy, the latest GDP report is scheduled for Tuesday and any further signs of slowing economic momentum might inspire the GBPUSD bears into further action.