Another week of high volatility to be expected on the Forex market

The euro was the second worst performer last week, despite appreciating by only a mere +0.49% against the beleaguered US dollar. Losses were significant elsewhere, especially against the Asian-Pacific currencies: the EUR/AUD fell 2.87% to 1.4492; and the EUR/JPY dropped by 2.34% to ¥128.36. This type of price action - indiscriminate selling versus risk and safe haven currencies alike - suggests that there may be greater troubles ahead.

This week, we expect a number of key eurozone economic reports scheduled for release. The most important of which are the German ZEW survey and eurozone second quarter GDP figures. Growth in the eurozone is finally expected to turn positive after six quarters of contraction but the expansion will be really light (expected to be only 0.2%). The two most significant event risks for the EUR/USD will be US retail sales and German GDP.

USD:

With the Federal Reserve being the only central bank talking about reducing stimulus, most traders would assume that the dollar should be headed much higher. However, rather than extending its previous gains, the greenback weakened against most of the major currencies in the month of July and extended its losses in August. The dollar is already trading at one-month lows against the euro, British pound and Japanese yen, and the Dollar Index trades now at 81.40.

This week traders will focus on industrial production, housing and confidence numbers. Consumer spending is the backbone of the US economy and a strong rise in demand could impact positively the dollar. However if the data falls short like the last non-farm payrolls number, the dollar could extend its losses.

GBP:

The British pound has performed well since the GDP forecast upgrade from the Bank of England. Since then, the GBP/USD rallied strongly and posted a weekly high of 1.5574 before pulling back to start a correction move.

Ahead on the economic calendar, the UK retail sales, employment and inflation reports will be closely watched. More importantly, the minutes from the most recent Bank of England meeting will be released this week. Last time round, the monetary policy committee left their asset purchase program unchanged and didn't release a statement. The question now is how many members voted in favour of more asset purchases, if any at all, and also how many members voted for the new unemployment rate threshold. If the decision on a threshold was not unanimous, sterling could come under some selling pressure.

JPY:

The Japanese yen surged against the US dollar, matching its best weekly performance since its June high. The yen strengthened despite any major fundamental drivers, the move can be explained by seasonal factors. In fact from 1987 through 2011, USD/JPY has declined 82% of the time in August when the Japan-US policy rate differential has been below 2%.

Second quarter GDP numbers are also expected from Japan next week and unfortunately growth is expected to slow slightly. In the first quarter, Japan's economy expanded by 1.0% and in Q2, it is expected to grow by 0.9% which is still in line with a gradual recovery and should therefore reassure investors.

NZD:

The New Zealand Dollar lost almost 2% last week after disappointing Chinese data showed slower than expected growth in New Zealand's biggest business partner. In addition, weak US data and a collapse in the prices of precious metals dragged down risk-linked currencies like the New Zealand dollar.

Gold:

Gold prices traded higher on Friday in reaction to a falling US dollar and stronger-than-expected July trade figures from China.
Spot gold edged up on Friday to settle the week at $1,313.32 an ounce, while spot silver rallied to settle the week at $19.91 an ounce, its strongest level since 22 July. 
At the same time, the US dollar index edged lower by 0.36% to trade at 81.13. The index has been holding around the seven-week low, while it stands more than 4% lower than the three-year high of 84.75 it reached at the beginning of July.
Precious Metal prices received a boost following upbeat economic data from China. On Thursday, Chinese trade figures were well received by the market with both imports and exports smashing forecasts in July. Chinese industrial production increased at an annual rate of 9.7% in July, accelerating from the 8.9% rise in June and ahead of expectations. 
This was the biggest jump since February, sparking economic optimism and lifting bullion demand from the region's manufacturing and industrial sectors. China is the world's largest consumer of gold, silver and other metals.

Overall, the market viewed Thursday's data release as an indication that the world's second largest economy may be recovering from the slowdown it experienced in the first half of the year. 
Looking ahead to next week, the major events likely to affect commodity prices include: U.S Federal Budget Balance, U.S Core Retail Sales, Crude Oil Inventories, U.S CPI, Philadelphia Fed Manufacturing Index and Michigan Consumer Sentiment.

Vincent Pellizzari is a trader at RTFX Ltd.