Can gold’s recent price action help determine breakouts on currencies?

Even though the major indices presented interesting movements last week, investors looked beyond stocks focusing on two major events. Unlike normal trading weeks where investors focus only on economic data or official’s statements, Gold had a say this time round, presenting a phenomenal two day rally. After presenting a symmetrical triangle, Gold soared higher breaking out during Tuesday’s session. Even though the move was fast and furious, intraday consolidation characterized as a minor pullback presented a buying opportunity shortly after, allowing traders to take this commodity higher. By taking a glance at the following 15 minute chart one can see that following the break of the upper trend line resistance level, Gold presented a comfortable pull back.


 
While analysts were giving various reasons behind the massive more, others were speculating that the move in Gold was due to expectations of a rising stock market that could put additional pressure on the U.S Dollar. One must note that the Dollar index is now trading above major support, holding its ground, despite Gold’s dramatic move.


 
In addition to commodities moving dramatically higher, employment figures had an influence on the markets, showing a mixed picture. Even though the unemployment rate jumped to a new high of 9.7%, the NFP result showed a dramatic improvement confirming a higher low. The result showed a 216k, compared expectations of 233k. In our previous report we stated the importance of a higher low, something that could confirm the recovery of the U.S economy.
 

Currency pairs hold at their highs, who will break out first?

Last week’s events had a major impact on the Forex market sending the various majors into mayhem. Even though most of the pairs finished the week around recent levels, a majority  them presented high intraday volatility, pushed higher at the end of the week by economic data and Gold’s momentum. In addition, the ECB had an influence on the intraday session releasing its interest rate statement. Even though a “no change” release was widely expected by investors and already baked into the market’s price, many were looking towards the statement, as Trichet commented on future monetary policies. The ECB president continued to back up his recent words mentioning that the central bank stands ready to remove ‘excess liquidity’ from the markets to ensure price stability. In laymen terms the bank mentioned that it sees that the Euro-zone is now showing signs of mild stability and that it will possibly remove money from the system within due time. The bank mentioned that these steps will take place only once the banking system stabilizes and they can see that lending has returned to a normal state.

From a technical point of view most of the pairs are looking ripe for a break out. Even though September is known to be a gloomy month, often characterized by lackluster movement, one cannot ignore recent price patterns. To help determine the strength of each currency due to the Dollar’s lackluster movement, this time round we can use a neutral asset to measure relative strength. Furthermore when taking into consideration Gold’s recent price movement, we can assume that stronger currencies that held their ground against Gold, could be the first to present break outs. When taking a glance at the following chart one can see that following Gold’s dramatic move higher the Australian Dollar managed to hold, presenting relative strength.

Euro’s relative Strength


 
Australian Dollar’s relative Strength


 
British Pound relative Strength


 
For further charts and price patterns see our technical analysis page

Conclusion

Even though most of the major forex pairs are now stuck in range, the Australian Dollar is presenting more signs of a possible breakout. Despite that fact one must take into consideration the upcoming economic releases. The employment change will be released this week, a result that could ruin the party. Furthermore the jobless rate is anticipated to reach a six year high of 5.9% while the jobs situation continues to weigh on Australia’s economy. In addition, the retail spending report is scheduled to be released and is currently expected to show a 0.5%. A result below that level could prevent the Australian Dollar from strengthening against its counterparts.