EUR/USD at a key level; is it the calm before the storm?

EUR:

The euro benefited mostly from greenback outflows that were driven by risk aversion trades throughout the course of last week. EUR/USD rally was rather strong; the pair gained roughly 1% last week with a major spike seen on Tuesday following disappointing NFP data disclosed on Tuesday 22 October. Despite the fact that it is now trading near a two year high against the US dollar, the bullish picture remains intact. Even though according to the weekly and daily stochastic oscillator the currency pair is deeply overbought and this could limit the upside potential.

Further up move for the currency pair this week, will depend on US macro news. Knowing that the FOMC will keep its monetary policy unchanged we can infer that this dovish, non-event, is already priced in the greenback's price action - so expect the market to move according to other fundamentals. In case the series of macro data remains weak (just like the NFP) then it should push EUR/USD higher and trigger a new leg up on stop losses triggering leading the pair to 1.40 territories. Otherwise we could see a healthy pullback, indeed many analysts think that the pair is overheating and too much strength for the euro could hurt euro zone exports.

USD:

The greenback suffered from a series of weak macroeconomic news last week, in particular a large miss on a much awaited NFP data added to the already existing tensions in the currency. In fact on Tuesday the NFP data was expected to show that 180'000 jobs had been added to the economy for the month of September, but actual figures only reached a poor 148'000 new jobs - this left its mark on the dollar for the rest of the week. The Bloomberg Dollar Index reached a low of 78.998 on Friday before gaining back some momentum, but this was not really significant given that the market participants are now awaiting the next major macro driver for the US economy later this week.

Market players will be focused on the two-day FOMC meeting that will start on the 29 October, during which the Fed policy makers are expected to maintain their 85$ billion asset purchase per month at least until March 2014. This monetary policy is seen as dovish for the US dollar, which explains why the currency stays at a two-year low level against its major counterpart, the euro. The FOMC meeting is not the only significant upcoming event on the economic docket, macro data such as retail sales, consumer confidence index, the ADP employment change and the CPI for September will add to the volatility on the greenback; and should the data come out weaker than expected, it could send it even lower than the lows seen last week.

GBP:

Last week Cable remained mostly range bound between 1.625 and 1.611. The Bank of England insisted on the fact that it will be looking at macro data on the employment front to decide whether to tighten its monetary policy or not. According to Mark Carney, the Bank of England's Governor, the 7% unemployment rate would be a trigger to reconsider its monetary policy stance, rather than to automatically change it.

AUD:

The Aussie ended its rally quite abruptly on Wednesday, 23 October, upon fears of a probable Chinese monetary policy tightening to curb inflationary pressures. In case, the Chinese Central bank should reduce its supply of liquidity to the market, it could weaken the demand for Australian commodities and the Aussie. Another bearish factor for the Aussie comes directly from the Reserve Bank Governor Glenn Stevens which said earlier this month that the Aussie was looking overvalued. Thus the speech he'll hold tomorrow will be closely watched by traders looking for hints about his view on the currency.  

Gold:

Gold price surged to hit a four-week high last Friday hitting 1,355.97$/ounce as it rediscovered its safe haven asset status. Indeed, speculation over Fed quantitative easing continuation lifted the yellow metal as it will probably lead to further dollar devaluation. The 85$ billion monthly liquidity injection should continue at least until March 2014.

Overall last week, Gold prices gained 2.62% from the opening at 1316.22$/ounce to the weekly closing at 1350.73$/ounce. Gold is clearly in a rally, which began two weeks ago with the end of the US Government shutdown and was sustained thanks to a disappointing NFP print.
As we soon enter November, we can expect an anticipation of November's seasonal effects on Gold. Indeed, the demand coming from India is at its strongest for the year due to the festival season and Diwali.
Alongside the Federal Open Market Committee Statement, other key news events which are likely to affect precious metals include: US Pending Home Sales, US Core Retail Sales, and US ADP Employment Change.

Vincent Pellizzari is a trader at RTFX Ltd.