Weekly Currency Insight - December 18, 2015

Today's Highlights

• GBPAUD remains within a corrective donwntrend
• GBPNZD breaks the uptrend
• Pound sustains a significant rally

FX Market Overview

The economic landscape in the UK continues to improve as it was reported that retail sales rose by 1.7% last month exceeding forecasts for growth of only 0.5%. Black Friday discounts were behind the move as consumers spent online and on the high street. Volumes were up probably due to the discounting however the total amount spent was also up on the year by 1.4%. Hopefully that will be reflected in my Christmas stocking next week. The Pound barely moved on the news as events elsewhere took centre stage.

The Euro lost a little ground yesterday as German business sentiment unexpectedly deteriorated in December. The IFO index fell to 108.7 after rising to 109.0 in November. The weaker figure, although a disappointment, is still fairly robust particularly considering weaker global trade and rising geo political tensions. The single currency will almost certainly remain under pressure while traders get to grips with the increasingly divergent monetary policy stances of the ECB and the Federal Reserve.

Canadian inflation data is expected to come in relatively flat this afternoon. The Bank of Canada has stated that the drop in energy prices and the depreciation of the Canadian dollar are having a temporary impact on inflation so the core reading will be closely watched. This has been fairly robust of late (2.1% last month) and another rise would put it above the BOC's target. The Central bank will probably remain on hold for the time being especially in light of the weaker oil price but this afternoons data will be closely watched.

Today is fairly light in terms of data and as traders square their books and look ahead to the holiday season. Markets seem inclined to purchase US dollars after the recent rate hike and I expect that mood to continue into year end.


AUD

From a technical perspective, GBPAUD remains within a corrective downward trend and is currently testing the long term uptrend that has been in place since April 2013 (green line on the chart). We have however broken out of the up-channel that had been in place since the Scottish Referendum result (Sept 2014) which does suggest the trend is changing.

If we see a confirmed break of the long term trend (usually we would look for several closes below the level – currently 2.07 or so), then we would expect to see the market pick up some support at 2.065 and then 2.025. For the time being the tren d line is holding, but we would recommend keeping a close eye on this.

In terms of upside potential, the previous up channel will provide initial resistance (2.101) and then the current down trend is likely to cap things for the time being (2.132 as we speak but this is a downward slopping line so the level will drop as time goes on).

It is worth mentioning that over the festive period, there is the potential for increased market volatility due to the thin market volumes (with so many traders away from their desks). In these conditions the trades that do take place have a bigger impact on prices than they would do usually so placing orders is a sensible strategy.

CAD

Looking into the New Year, Canadian jobs data will be reported on Jan 8th; Bank of Canada have their policy meeting on Jan 20th, and whilst they will have a large bearing on how the Canadian dollar fares the largest influence remains the price of oil. As I write oil price is back on the lows, WTI (West Texas Intermediate) which is North American crude oil price, is currently trading at 35.02 USD/bbl and analysts see more downside which will add more downside pressure on CAD.

Technically after falling to 1.98 level at the start of the month GBPCAD break up through the top of the channel (T4) and over the next fortnight rallied strongly to retest the August high (T6). If the prices do break to the upside then next target is 2.15/2.16. Conversely if it fails to break through T6 then it could be the start of a reversal charting pattern known as a triple top – a confirmed reversal if prices fell below 1.98 again, opening up much larger correction lower.



EUR

After an aggressive 5 cent move lower Sterling Euro has traded sideways for the most part of the week and has consolidated around the 2 month lows. Sterling Euro is awaiting further direction as the follow through move from ECB's disappointing Stimulus announcement has now paused. Technically Sterling Euro looks slightly oversold and appetite for the Euro is waning finding support at the 1.37 level on 3 occasions. Sterling Euro has now broken higher from the recent downtrend - which makes a case for a move higher .

Data from the UK has been on the whole encouraging this week which would support a correction too. Retails sales in November alone jumped by 1.7% from October beating all expectations and the unemployment rate ticked lower to mark a 7 year low. The only concern from the BoE is the average earning which was the slowest since March - with a Robust Labour market and meagre wages this has continued to perplex policy makers, which may keep interest rates lower for longer.



NZD

Technically, we have seen GBPNZD break the uptrend (blue line on the chart) that has been in place since the 20th of April (as mentioned above). Having seen such an aggressive move from 1.93 to 2.50 (approx. 30%) in a 4 month period we were due a correction. However, the break below the uptrend is certainly a concern. This suggests that the trend is changing and this may be more than a correction.

As a rule of thumb, we usually expect a market to correct between 38.2 & 61.8% of the proceeding move in a trending market. Currently we’re trading just above the 50% Fibonacci level at 2.215, if we see a confirmed break of this level (usually a weekly close or several daily closes below the level would been seen as confirming the break) then we would expect to see a move towards 2.148 the 61.8% level. 

There is potentially a head and shoulders reversal pattern that has formed over the last 3 months in this currency pair. If this pattern is indeed completed, then this would give a price target of 2.00. Personally, I think this is unlikely but it cannot be ruled out. 

Whilst it is disappointing that we have seen the rates fall of late, it is worth remembering that we’re currently trading 15% higher than in April so buyers are still significantly better off today than they were.

It is worth mentioning that over the festive period, there is the potential for increased market volatility due to the thin market volumes (with so many traders away from their desks). In these conditions the trades that do take place have a bigger impact on prices than they would do usually so placing orders is a sensible strategy.



USD

The Sterling dollar exchange rate has been under pressure all week and this looks set to continue into year end. The fallout from the hike in interest rates form the Federal reserve has seen the dollar strengthen significantly against a basket of currencies. Divergent monetary policy is driving the market at present and as hopes of an early hike in interest rates fade in the UK Sterling is losing some of its lustre. Retail sales yesterday came in much higher than expected and that still failed to see the Pound sustain a significant rally proving that the market is looking for excuses to sell the Pound. Next week is fairly quiet data wise so current trends should prevail. A break below 1.4850 could see us test the 2015 low of 1.4567.