FX and Gold - Weekly Outlook April 02 - 06: Bernanke cautious after his comments sent stocks soaring

During the week, the focus of the global financial market remained tilted towards Fed Chairman Ben Bernanke's speech. He appeared on four different occasions as market tried to gather clues about the direction of US and Global economy.
The initial reaction after his first speech that he delivered at National Association for Business Economics (NABE) Policy Conference was that he supports his low interest rate policy that the Fed may continue with its easing policy stance. It was also felt that the Fed would soon opt for another quantitative easing.
Stocks recorded one of their biggest gains of the year after Bernanke suggested that the US economy still needed help to produce faster job growth. Gold prices roared, gaining over USD 20 in a hope through QE excess liquidity will create demand for the yellow metal. The US dollar eased as Bernanke voiced his concerns about future job condition that will entirely depend on good growth rate.
But Bernanke realised soon that not only did his remarks help explain why the Fed plans to keep short-term interest rates at record lows through 2014, his words can easily shift market sentiment. In his next three speeches to university students he, therefore, successfully struck a delicate balance by offering a highly realistic assessment of the US economy.
Although he showed his concerns about inflation due to rising oil prices, his priority was clearly visible like any other sensible financial administrator that he wants to reduce unemployment, which could only be attained by maintaining above average growth rate.
Bernanke knows that the US economy has a bumpy road ahead. He is aware of the debt cost the nation has to pay by hiking interest. He strongly appreciates that high interest rate will increase pressure on country's debt, which is not affordable. He was clearly concerned with the pace of economic growth.
Meanwhile, despite some formidable hindrances European policymakers have so far showed their responsibility to meet challenges. They have successfully reached agreement on quite a few demands and have made commitments to implement austerity measures to ease the Euro zone crisis.
Promises and commitments made by the affected Euro-zone nations have led to raising European firewall from Euro 500 billion to somewhere between Euro 700 billion to 800 billion, though these funds will not be big enough to handle a bailout of Italy or Spain, the region's third and fourth largest economies. Independent analysts are of the view that a bailout of around Euro 2 trillion would be needed if the crisis spreads to Italy and Spain.
In a major austerity move this year, Spain decided to cut its budget by 16.9 percent (Euro 27 billion) to reduce its deficit to 5.3 percent. Its economy is expected to shrink by as much as 2.7 percent this year and could find little to spark growth if the government is forced to raise taxes to meet this year's fiscal deficit objective and the target of 3 percent in 2013. It was for the first time since the crisis began last week that protest rallies across the country witnessed violent scenes as frustration deepened at the government's failure to address the 23 percent unemployment rate which rises to almost 50 percent for the under 25s.
As major European events seemed to have been settled, market would once again start this week focusing on economic data.
On Monday, there is a tall list of data release from Europe. But market will be keenly waiting for the release of ISM manufacturing data from the US, which is a key US economic indicator that provides a clear picture of development in private sector. The importance of these economic numbers is that strong data dampens the prospect of another easing, whereas weak numbers strength the case of continuation of easy monetary policy stance.
On Tuesday, Australian Central Bank will take a key decision on its interest rate. I will not be surprised to see a 0.25 basis point cut in rate due to signs of a weaker Australian economic growth. With indication of softer Chinese growth and falling global commodity prices, a strong AUD could further hurt its exports. Hence, the Australian Central Bank (RBA) has a good case to slash its cash rate from 4.25 pct to 4 pct.
On Wednesday, the ECB will take a decision on interest rate, which will be followed by a press conference. There should be no surprise as the rate is expected to remain unchanged
On Thursday, the UK will announce its Industrial and Manufacturing production that will be followed by BOE's interest rate decision. But the UK is in no mood to hike its rate despite extremely high inflation rate; and it is likely to continue with its ongoing QE policy.
On Friday, US Nonfarm Payroll and US Unemployment data will provide a better picture of US economy.
GOLD @ $1667.40 = A 20 dollar boost that gold got by the Fed Chairman's statement was short-lived after more clarification. It came under a renewed selling pressure following the ongoing Indian bullion and jewellers strike and China slowdown. By the weekend, it made some recovery on the news of a raise in European firewall. But gold investors will be looking for some more clues.
One major development that could possibility push gold prices higher this week is suspension of a 14-day protest by the Indian bullion and jewellers.
On Monday morning, I am expecting Gold to stay above $1664 and may see it hitting $1673-75 levels. This week, I would prefer buying gold on dips around $1662-64 if seen as bias will remain on the upside. A break of $1678-80 will push gold to $1685 but $1704 is the key level to watch for the next up move. On the downside, major protection is at $1648 Range for the week $1655 - $1690.
EURO @ 1.3338 = This week bias for Euro is on the upside, but needs to clear resistance at 1.3395. Only a break here would push the European currency towards 1.3450. However, any failure to clear resistance would risk for a drop to 1.3280-00 zones before making another upside attempt. Any move towards or beyond 1.3450 would be a good opportunity to sell Euro because the next big challenge for Euro would be to surpass 1.3490, which may not be possible unless US economic numbers badly suffer. Range for the week 1.3180 - 1.3490
GBP @ 1.6004 = Cable could initially maintain its strong tone and buying on dips would be the preferred strategy, as it has strong support around 1.5925. With its next up move the British currency will be entering a risky zone. On the upside, will find strong resistance around 1.6080 and only a break here would encourage for 1.6120. However, on the downside it has protection at 1.5870. Range for the week 1.5820 - 1.6120.
YEN @ 82.78 = As per my weekly call, it was another successful week. Yen weakened to hit the highs of my projected level of 83.33. This week I am looking for a break of 82.20 that could encourage for a test of 81.70. However, I will not be surprised to see if Yen will be falling to make further gains and a bounce back to 83.50 could be a possibility unless 81.20 surrender. Range for the week 81.40 - 83.80
CHF @ 0.9018 = Swiss Franc will continue to flex its muscles and will probably test SNB's patience, as it is very close to the parity against Euro. I see continuation of tight range as buying of Swiss currency on dips to remain intact unless Swiss Central Bank surprises the market. The currency will be bought around 0.9060. A break of 0.8980 will encourage for 0.8655. Only a break of 0.9120 will ease the buying pressure. Range for the week 0.8950 - 0.9110.