FX & Gold weekly outlook January 14-18: 2013 begins on positive note

Year 2013 began on a positive note. After the settling of looming US ”fiscal cliff” issue, market got the much needed boost. China”s economic growth is a big factor that has helped the world regain a positive sentiment.

Global financial market go a further boost after ECB President Mario Draghi”s firm tone following its Thursday”s monetary policy announcement that despite a weak growth projection in the Euro-zone region in 2013, it”s economy is likely to pick up in the next quarter and therefore the decision to hold rates by ECB members is unanimous.

This could be a good start as Europe did manage to avoid recession. Bond yields are back to the desired levels, as last week we saw Spanish 10-year bond yield dropping to below 5 percent. Draghi in his press appearance added that capital has started to flow in Euro-zone region, but simultaneously warned that region”s economy will remain weak in 2013 as the growth is still on the downside.

Though it all sounds too optimistic, facts may differ from reality. But there are many glitches that still need attention. Unemployment rate in the region announced by Eurostat jumped to a new record high of 11.8 percent or 18.820 million people are out of work in the Euro region that strings attached can still deteriorate economic conditions.

Though German business community is showing some strong signs optimism, all eyes should be on Germany”s economic data as it is Europe”s growth engine. Interestingly, the market has faith Draghi”s medicine and nothing bothers the market about certain downsides such as downgrading of quite a few Euro-zone countries by the rating agencies or threat that the economic worries of Spain, Italy or Greece economic could still aggravate. Probably because of three factors, they know that the ECB can print money at will. The governments can easily obtain clearance from parliament, which does not object to bring a change in laws and the regulatory changes can be made according to their needs.

However, despite quite a few events last week, market will once again concentrate on economic data. Speeches on Monday and Tuesday will reflect the mood of the Fed officials and growth expectations in the US and higher UK CPI data will give confidence to GBP. On Wednesday, there is a long list of US economic data that could shift market sentiment. Then again on Thursday the US Bureau of Labor Statistics will announce CPI, which is the key indicator to measure inflation and later in afternoon Fed”s Beige Book through interviews with economists, market analysts and corporations obtained by Fed”s 12 Reserve Districts will provide a picture of US growth outlook. On Friday, Asian market will be looking at Chinese GDP, which could reflect a better picture about growth in the region. A positive number will give boost to the global sentiment, as recently China economic numbers have been showing constant growth and as the day progress focus will shift towards the UK and the US economic data.

GOLD @ $ 1662.30 = Gold will continue to struggle to make a move beyond $ 1695 as it has a strong barrier at $ 1684. However, unless initial barrier is around $ 1675, which is still considered a good selling area for a drop and needs to push below $ 1642 for $ 1625. Bias is on the downside;

EURO @ 1.3341 = Euro that surged on Friday after Japan announced its plan to buy European bailout bonds to help debt crisis may initially get a boost. Euro could get some further support if economic data hits the positive territory, but European currency”s firm tone could soften by the weekend.

Euro has resistance around 1.3395-05 and break of this level would only encourage for 1.3470. A downside risk will increase on a break of 1.3210 that could pave way for 1.3150. But buying interest will be seen on dips as the European currency will attract investors to pick at the bottom of chart. Range for the week 1.3020 – 1.3470;

GBP @ 1.6127 = Cable has a strong support around 1.6020-40 zones and we could see a bounce back towards 1.6220 zones. However, 1.6280 will be protected as Pound Sterling may not have enough legs to climb and selling interest will be seen on the rise. Range for the week 1.5990-1.6320;

JPY @ 89.17 = Japan”s decision to invest in the European debt is a smart move by Japanese Premier Abe, as he is supporting a weak Yen to address Japan”s ailing economy. Japan already holds Euro 7 billion temporary rescue funds bonds known as EFSF. Plan to continuously buy ESM bond with its foreign exchange reserves will help counter objection if raised that Japan is manipulating its currency, which is commonly faced by China. Such a move always takes out the sheen of domestic currency, which is the strategy of newly elected Japanese government plan and it looks that despite a technically Japanese currency is being oversold Yen could potentially further weaken, which means USD is still a good a buy on dips.

Risk for sharp correction is always a big possibility, but resistance is at 88.30 with the next major resistance at 87.40. However, a break of 90.10 will encourage for a test of 90.75, where Japanese could take a breather. Range for the week 87.40 – 91.10;

AUD @ 1.0533 = Aussies found resistance at 1.06, but investors will not hesitate to buy the commodity currency on dips due to a significant yield advantage. Thursday”s poor employment data could provide investors with another opportunity to buy AUD on dis. Prior I am expecting a test and a break of 1.06 levels, but profit-taking could be seen around 1.0650. A drop below 1.0520 will open gates for 1.0450. Ideally, 1.0370 will be a good entry level for the investors. Range for the week 1.0350 -1.0680