FX & Gold weekly outlook - June 25-29: G20, Fed''s MPS keep market on its toes

Global financial market witnessed another eventful week due to elections in Greece. Meeting of G20 member countries in Mexico and FED''s Monetary Policy Announcement (MPS) that kept financial market on its toes as trading activities around the world remained choppy.
Greece election results gave sigh of relief after voters showed confidence in electing the pro-bailout supporters easing fear of imminent Greece exit, which also means that with the continuation of its austerity policy, Greece will be eligible for next bailout package.
The risk was that Greece departure would have catastrophic impact on all ailing European economies that could have potentially dragged the global economies. But Greece story is not over as yet and has unending bumpy and risky road ahead.
As I have pointed in my various columns that Greece is one of the European issues and hence, the respite was short lived as Italian bond yields too soared sharply to record high.
Spain''s banking sector demand for funds immediately popped-up, as the country still requires huge amount of money for capitalisation that helped surge in 10-year Spanish bond yield beyond 7 percent for the first time. Recent private auditor''s reports suggest that Spain''s banking sector will require funding more than earlier though that could exceed by another USD 60-80 billion. It is expected that today (Monday) Spain will apply for bank bailout money.
In another event in a G20 meeting last week, the outcome was not productive. French President Hollande did show his concern about high Spanish and Italian interest rate due to rising European bond yields, which is expensive to service debt. His fear would be that every European country is laden with huge debt and France too faces the European risk.
By mid-week market concentration diverted towards FED FOMC announcement, as continued disappointing US economic data raised hopes that FED could opt for QE3. But FED extended its Operation Twist (OT-2) programme until December, to swap USD 267 billion short-term securities with long-term debt.
Though FED avoided injection of excess liquidity though QE3, but the language used in July MPS is Dovish. It has slashed its growth and unemployment projection by 0.5 percent and 0.2 percent, respectively, though inflation fear has receded that has been projected downward in a range between 0.3 to 0.5 percent.
Since the downward revision of economic projection is significant, the US economy is at huge risk of prolong slowdown. One thing is for sure that FED cannot do anymore twisting because it does not hold short duration securities. To go for OT-3, FED has to use its USD 580 billion by selling three years to six year bond. In this scenario QE3 looks a better option. Hence, it has once again raised a hope if FED needs to act it will for quantitative easing in its August FOMC.
Interesting thing to note is that before July FOMC announcement there was lot of talk about the speeches made by FED 12-member voting officials with many interpreting that the consensus is that half supports OT-2 and the other half is in favour of QE3, but out of 12 votes 11 preferred Operation Twist over quantitative easing.
What does this indicate? To me the message is very clear. FED official will be keenly watching the US economic data. Strong data will help in avoiding QE3, but weak data too will not encourage FED officials to go for QE3 because they will be only couple of months away from US elections. FED cannot afford siding with any party and since QE3 could be beneficial for the government, FED will stay cool. Perception is that Operation Twist only helps Stocks and bond market, whereas, Quantitative Easing not only helps US Dollar, stocks, bond and commodity market, but also will help new business openings that could create jobs.
During this period FED will be closely watching US economic data. There one unemployment report, which I am expecting to show improved result. But bad data will surly keep the market nervous.
Important event of the week is European leaders'' meeting to discuss/resolving eurozone issues. But global economic data will guide the market about the business trend, on Monday there are minor European data, which may not matter much, but US New Home Sale data will be first guideline of the week about last month''s single and family home sales. On Tuesday there are couples of US economic data that may not have much impact on the market. On Wednesday, Germany and UK will be releasing its data, which is mild, but in the early US opening session Durable Goods Data may provide market the required spark. On Thursday European data will keep market on its toes as German unemployment rate will tell provide clues about the economic activity in Germany and in next 35 minutes UK will announce its GDP and Current Account Data, which may provide more direction. Friday will comparatively be a quiet day as there will be no release of any major economic data.
GOLD @ $1572.10 = The fall in the later part of the week is quite in line of my forecast, as gold did struggle around $1,630. The falling trend will continue and I would prefer picking the top to sell gold. Gold Top is around $1,582-85, which should hold a break of $1,552-54 support levels will pave way for $1,533. Upside break of $1,592 delays down move.
EURO @ 1.2570 = It was another successful week, as euro could not penetrate beyond my given level of 1.2720 and later saw a prefect drop to hit target 1.2520. Now euro has barrier around 1.2650, which needs to clear for 1.2740. However, as long as resistance 1.2650 holds risk for a drop below 1.2480 will increase to test 1.2420. Ranges for the week 1.2400 - 1.2820
GBP @ 1.5583 = As per my forecast GBP made a perfect move towards 1.5775-80 zones, but failed to break then dropping down nicely though missed my downside target of 1.5550 by a whisker. This week once again Cable may struggle to penetrate beyond 1.5690. On the downside requires a break below 1.5510 for move down to1.5430. Upside break of 1.5750 negates the downside rally. Ranges for the week 1.5420 - 1.5740
JPY @ 80.42 = Yen has weakened more than expectation, last week I did call for a test of 80.20. However, the down move of Japanese currency has strong support around 81.25 and only break would encourage for a test of 81.85, which I do not support any weakness could short lived as the currency has the ability to bounce back, but the currency gains will not accelerate unless penetrate beyond 79.02 for 78.40
Last week I warned that Yen needs to break 79.80 for more losses before making gains. The loss could not extend beyond 79.70 resulting sharp gain as per expectation hitting target 78.80. Ranges for the week 78.20 - 81.75
CHF @ 0.9552 = Swiss Franc will continue to trade around euro parity 1.20 and therefore Swiss currency will find resistance around 0.9480, only break risk for test of 0.9440. But, I will not be surprised to see easing of currency and could dip to test .09610-20 zones, break hear could see another 40 pip loss. Ranges for the week 0.9440 - 0.9670.