Talking Forex Weekly Outlook - 24/10/11

EUR/USD

The Eurozone sovereign debt crisis is set to continue to dominate the price action this week after the Troika announced that it now expectd that Greek debt will peak at 186% of GDP in 2013 and decline only to 152% of GDP by end-2020 and to 130% of GDP by end-2030. As a result, it now looks increasingly likely that the initially proposed 21% PSI level will be revised sharply higher. According to latest reports, officials are considering options with writedowns of as much as 50%, while others have called for upfront bond exchanges into either AAA rated bonds from the EFSF or new 30-year Greek government debt. Talks over the weekend also centred on the EFSF, which given the opposition by the ECB and Germany is unlikely to get a banking license which the French government has been calling for since the day one. Finally, the latest CFTC report shows that speculators increased their net short EUR position to 77,720 contracts from net shorts of 73,795 the previous week, while the value of the USD’s net long position rose to USD 14.86bln in the week ended Oct. 18, from net longs of USD 14.24bln a week earlier. In terms of technical levels, supports are seen at 1.3759 which is the 10DMA line, followed by 1.3653 and then by the 21DMA line at 1.3583. On  the other hand, resistance levels are seen at 1.3916 which is the 55DMA line, followed by the 21Day Upper Bollinger Level at 1.3962.  

GBP/USD

Although the pair may continue to benefit from apparent safe-haven status as market participants seek alternatives given the sovereign debt crisis, near-term upside looks limited, especially since the BoE only recently resumed asset purchases to prevent another recession. In addition to that, there is a real risk that should Europe’s economy slide into a recession, that the UK government will have to drastically review and backtrack on debt reduction pledge, which in turn may lead to a sovereign downgrade and thus higher borrowing costs. As such, the recent influx of so-called safe-haven flows is somewhat irrational and may reverse unless pace of the economic activity picks up. Finally, technical studies indicate that supports are seen at 1.5820 and then at the 10DMA line at 1.5738. On the other hand, resistance levels are seen at 1.5991, 1.6084 and then at the 200DMA line at 1.6130.  

USD/JPY

In spite of printing a fresh record low last week, the pair the set to remain under pressure given the safe-haven attraction, which continues to be backed up by fears of an another global recession should the EU leaders fail to resolve the sovereign debt crisis. However it remains to be seen whether the BoJ will continue to tolerate the unrelenting JPY strength, which has become a serious issue for export driven companies in Japan given the associated hit on margins. As such, there is a risk that the BoJ may chose to enforce a more pro-active JPY weakening stance and go as far as announcing that it will defend a certain exchange rate.