FX and Gold weekly outlook - July 16-20: Merkel''s nod for recapitalising of European banks flayed

Depressing news from Europe kept market alert as euro fell to a 2-year low. About 170 top German educationists/economists lodged protest over Merkel''s nod for allowing direct re-capitalising of European Banks, which will hit tax payers'' purse.
Italian rating cut by Moody''s is another indication that European worries are far from over and further confirms that its economy has enormous risk. Minutes of last FED FOMC meeting had nothing new to add, which means that for more easing US economy has to further deteriorate. This week''s UA data reduces the probability of easing as last month''s wholesale price surged sharply.
Last week''s Chinese economic slowdown though positive due to the expected number, added to the global worry as the economy grew by 7.6 percent against 8.1 percent growth in 1st quarter. Current pace of growth is good enough to keep its domestic market active, but high Chinese growth was one factor that was providing a helping hand to the global slowdown.
LIBOR cheating is one huge development that is not getting proper attention, as market avoided reacting to the news probably because all major financial institutions are involved in some way or the other.
LIBOR rate rigging that involves world''s biggest and most powerful banks is in a fix as cross-border investigation is going on for fixing of interbank lending rate. FED was informed by an unidentified employee of one of the London based banks in 2008, the bank in London is said to have released the document confirming the news.
Basically, British Bank Association announces the rates that are fixed by a select panel of banks through polls is calculated and published in for several currencies on daily basis. The fixing of benchmark rates helps to calculate payments equivalent of over USD 350 trillion worth of financial institutions that includes mortgage, derivatives, bank loans and credit cards.
Investors are fast losing their confidence in the banking sector. Since this rigging of interest rates has been going on since 2007-08 it may not be easy to assess the damage, but some of estimates based of calculation by research institutes suggest that LIBOR rates were off by 30 to 40 basis point.
I will not be surprised if the benchmark interest rate scandal hit the market anytime that affects the price at which consumer and corporations around the world borrows funds. This is another slap on the face of financial sector/regulator/rating agencies.
Market will continue to focus on developments in Europe, which remains key direction provider to the financial market''s move this week. European and US economic data will also be keenly watched for next Central Bank move.
GOLD @ $1588.70 = Gold moved in line of my weekly forecast making sharp recover after dipping down and finding good support around $1,550, but found resistance at $1,596.
Last week optimism is due to fall in Chinese GDP number to 7.6 percent vest last quarter''s 8.1 percent strengthening believe that despite 2-cuts in a month, China will further ease its policy to halt the slide.
Ongoing global easing is also helping the yellow metal as Korea, Brazil and UK eased to stimulate its economy. There are many, who still believe in US easing in its August policy announcement, but keep in mind that FED minutes clear stated that it does not favour easing. ECB easing is one big factor that also helps gold for carry trade opportunity versus EURO because of currency''s liquidity factor. Initially bias could be on the upside until Bernanke''s Wednesday testimony. But gold will find regular sellers above $1,600 because the yellow metal itself is not too appealing due to high price and is a dead asset that does not offer return. It has strong barrier around $1,604, break is required for a move toward $1,620-25 zones. However, I am expecting that market will pick the top and break $1,678 will encourage for test of $1,528.
EURO @ 1.2248 = The down move did continue but could not break below 1.2170-80 zones convincingly to survive further fall. If euro fails to move beyond 1.2295 there is a risk for further down move to test 1.2150 a crucial level. If downside break occurs we may get closer to 1.20. However, upside break will encourage for a test of 1.2360. My preferred strategy will remain unchanged to pick the top and sell European currency. Ranges for the week 1.2010 - 1.2420
GBP @ 1.5574 = Cable made a late recovery and bias this week remain on the upside and this upside momentum should continue. Cable has strong support around 1.55 zones could penetrate beyond 1.5670 for 1.5770-90 before exhausting. Only break below 1.5450 could risk for more losses. Ranges for the week 1.5570 - 1.5795
JPY @ 79.17 = Yen trade in a narrow band and is gradually likely to weaken to test 79.80 and only clear break could extend the fall towards 80.15-20 zones. However, Japanese currency has the tendency and could bounce back to test 78.80 to challenge 78.40-50 resistance levels. Ranges for the week 78.40 - 80.50
CHF @ 0.9808 = Swiss Franc will meet resistance around 0.9750 and will have to clear for more gains towards 0.9710. Failing to make gains could risk for drop to new lows, possibility towards 0.9880. Break risk for a test of 0.9985. Ranges for the week 0.9680 - 0.9995.