FX and Gold weekly outlook - August 06-10: European monetary policy dominates financial market

Despite two major events, FED''s monetary policy announcement and weekend US jobs data, it was European monetary policy statement followed by press meeting of ECB President Mario Draghi that dominated the global financial market.
Since Europe''s ongoing problem remains matter of grave concern, as numerous measures taken by the European policy makers have so far failed to reduce the grievances. Sentiments about the eurozone regions are at very low ebb.
An initial thought about Draghi''s appearance was that he is going to come up some kind of solid support to defend his earlier statement that lacked action, which disappointed the market as Spanish bond yield spiked to 7.08 percent, which is not considered sustainable by the regions policy makers. Euro started to decline and European stocks came under pressure. Down Jones and S&P suffered too.
In his speech, he hinted that ECB plans to re-start buying of bonds, which could be by intervening in the market to drive down the rates. He warned that it is pointless to bet on euro. He did emphasise that for EFSF/ESM bond buying ECB needs government support.
Basically he provided market with his list of hope or could be his wishful thinking, which has become a normal routine job of policy makers and is short of expectation.
But, in my view, on Friday there was a change in market sentiment probably after interpreting Draghi''s speech for second time. There are two major factors that could be useful from ECB''s point of view to bring currency stability and to bring down that bond yields that may help increase in economic activity in the eurozone.
By sending strong message that ECB will take all action and will intervene in sovereign bond market through bond buying on the shorter end of the yield curve, ECB will remain consistent with the classical monetary policy. This clearly meant that ECB through its Open Market Operation (OMO) will inject ample of liquidity in short term to bring down the interest rates as Draghi has said that there is no limit set to ECB bond buying. It cannot intervene in long-term bonds.
Such type of ECB intervention/action will surely exert pressure and long-term yield that could fall sharply. But, this also means that ECB will have to go for another round of quantitative easing. It may not be possible for ECB to act immediately as this decision could only be possible after September meeting.
However, German Central Bank (Bundesbank) is the major hitch, as it has reservations about ECB bond buying, which the council will decide. It is expected that anytime Spain is likely to make a request for euro rescue funds and if Germany allows ECB purchase of bond, it will have positive impact on the market.
Other factors that could force market to bring down the short-term interest rate and bond yields is by further cutting rates and negative deposit rate, which may be a future consideration if ECB come across technical glitches and lack of government support.
Interestingly, despite stronger than expected US employment report dollar could not rally and instead euro made substantial gain as Spanish and Italian bond rallied. Payroll surged to 163.000 versus expectation of 100.000.
GOLD @ $1602.90 = Gold is still able to make a comeback, as it has found strong support around $1,580. This week we could start with small gains as break of $1,615 is required to test challenge 4 1,620-25 zones. Failure to break by mid-week would risk for a fall. However, dips below $1,588 will open gates for re-test of $1,582 and break would encourage for test of $1,570-75.
EURO @ 1.2386 = We could see some more euro gains that could extend to around 1.2430-50 zones. Prefer Selling the European currency if seen and will keep an eye on 1.2490 only break here risk for more gains towards 1.2520. A fall below 1.2280 will challenge 1.2220 and break would encourage for a test of 1.2150. Range for the week 1.2150 - 1.2550
GBP @ 1.5641 = Break of 1.5720 will pave way for a test of 1.5790-20 zones. But downside risk will increase if 1.5570 surrenders for a test of 1.5490. Range for the week 1.5450 - 1.5850
JPY @ 78.45 = Yen has strong support around 78.95 and the Japanese currency needs to surrender this level for test of 79.40. I still see risk for a test of 77.40-50 levels.
CHF @ 0.9703 = Swiss currency gains could exhaust around 0.9620-40 if it fails to penetrate this resistance level, which could mean that Swiss Franc could weaken to test 0.9780. A fall could mean re-test of 0.9820-40 zones. Range for the week 0.9610 - 0.9880.