Japan on Holiday, Europe on Meltdown

Japan on Holiday, Europe on Meltdown

While the Japanese were away this week for Obon holidays, Ms. USA took the lead on the USD/JPY pair and pushed the pair higher on the forex dance floor ahead of US consumer sentiment reading, after anticipation of a potential meltdown in the European markets.

Why would a potential meltdown anticipation be good for USD? It’s a paradox!

Eurozone markets both currency and stocks acted in a typically contrarian fashion yesterday. It seems as the old saying goes,  bad news on Main Street means good news on Wall Street. Here are the list of bad news out of Europe:

1- German GDP falling short of expectation.

The powerhouse of Europe seems to be in contraction and is now joining the likes of Italy, France will almost certainly join them soon.

2- No growth in EU

Eurozone failed to grow at all last quarter posting a figure of 0%, failing to reach both official and market consensus. The annual growth rate of the Eurozone is now running at one-third that of America and one quarter that of the UK.

Many are scratching their heads wondering why bad economic data is being treated as good news by the market. Equity and currency markets initially acted favorably to this news, with bond prices following suit. In fact German government 10 year bond yields fell below the psychologically notable 1% level. This is seemingly the ultimate paradox however there is some type of method and logic to what seems like madness.

The firm expectation that given this terrible news the ECB will be forced into taking additional measures and will have to increase monetary stimulus, through a combination of quantitative easing, further rate cuts and any other tools it has at its disposal. This certainly does seem like a logical conclusion and the pressure is mounting in Mr Draghi to put his wizards hat on and wave his magic wand.

The ultimate question is will this bet pay off. The deciding factor in this questions is whether one believes that the ECB has sufficient clout and indeed the wherewithal to be able to guide the Eurozone out of this extremely sticky situation. A situation that is getting worse and worse by the day and significantly worse every time a major piece of data is released.

As hard as the ECB may try it does not have sufficient policy tools to deal with the Eurozone’s main economic ailments, nor is it in the position to address the gargantuan debt hanging over the area. And it is most certainly not in a position to dictate the outcomes of the Russia-Ukraine situation, this is certainly one of the major variables, geo-political risk is something that Mr Draghi has no control over. In a slightly warped sense the markets are right to react in the manor that they have however, the bets have been placed the wheel is spinning the croupier has announced no more bets and the odds are not stacked in the Eurozone’s favour currently.

Short-term FX Signals

EUR/USD 4-hour: moving up

Invest Diva likes: Long positions above 1.338 with targets @ 1.341 & 1.347 in extension.

If pair goes nuts: Below 1.338 look for further downside with 1.333 & 1.311 as targets.

What’s up on the forex dance floor: The pair is dancing above the Ichimoku cloud with the RSI heading north above the neutrality area. A break above the falling wedge would confirm more up- moves.

Supports and resistances:
1.338 pivot point

USD/JPY 4-hour: Moving up

Invest Diva likes: Long positions above 102.49 with targets @ 102.72 & 103 in extension.

If pair goes nuts: Below 102.49 look for further downside with 102.30 & 102.11 as targets.

What’s up on the forex dance floor: The pair keeps dancing above the Ichimoku cloud, forming a new uptrend. The RSI is over the neutrality area.

Supports and resistances:
102.49 pivot point

GBP/JPY 4-hour: further down moves expected

Invest Diva likes: Short positions below 170.71 with target @ previous bottom 169.62.

If pair goes nuts: Above 170.71 look for further upside with targets @ 171.65 & 172.14 in extension.

What’s up on the forex dance floor: The Tenkan line has crossed below the Kijun line on Ichimoku Kinko Hyo. The pair is dancing above the key resistance at 170.71, could be forming a double bottom. If the pair is able to successfully confirm the double bottom pattern, that would change our outlook to bullish.

Supports and resistances:
170.71pivot point