- Euro and pound are under pressure at the start of the week owing to dollar strength across the board.
- Gold and silver are holding at crucial support levels, having fallen from weekly highs on rising yields.
- Focus in the week ahead will be on keynote speeches by FOMC speakers and the PMI data in the US.
It promises to be yet another busy day in the forex market in the aftermath of central banks failing to do much to curtail a spike in Treasury yields. The euro, British pound are all in the spotlight, having come under pressure in recent days retreating from weekly highs. Gold and silver are trading at crucial support levels, having felt the full brunt of the strengthened US dollar.
The euro weakness
It became clear that central banks are taking different stances in curtailing further spikes in yields. The European Central bank has already made it clear that it will ramp up bond buying to tackle surging yields. The FED, on its part, has opted to remain numb.
The ECB is yet to have a significant impact on the euro, which has continued to weaken across the board, feeling the full force of a strengthened dollar. Weakness has also been exacerbated by a plethora of mixed economic data that shows the Eurozone economy has a long way to bounce from the COVID-19 disruptions.
While German ZEW Survey data did show that the economic sentiment improved, inflation data continues to disappoint. While the euro has weakened against the dollar to two-week lows, it continues to strengthen against the yen.
The euro weakness on the Japanese yen was evident at the start of the week, with the pair heading to two-week lows.
EUR/JPY is trading in a downtrend in the short term, although the Bank of Japan failed to excite the markets by leaving the interest rate unchanged and dropping a 6 trillion a year ETF buying target should continue to work in euro strength.
On the other hand, the British pound is trying to remain firm after coming under pressure in recent weeks. Improving the UK economic outlook and an upbeat Bank of England statement should continue to offer support to the cable the week ahead.
The BOE remains upbeat about global growth and upbeat consumption in the UK. With coronavirus infections remaining depressed amid an aggressive vaccination campaign, the ongoing recovery should positively impact the cable.
Likewise, the cable continues to register substantial gains against the New Zealand dollar under pressure amidst recession fears. Fears that some parts of New Zealand could be placed under lockdown owing to a new British COVID-19 variant are already fuelling economic contraction fears.
There are fears that the New Zealand economy could shrink by 0.7% in 2021 owing to border closures aimed at combating the virus.
Gold and silver under pressure
In the commodities market, silver is struggling for direction, having experienced strong resistance at the $26 mark. The confirmation of a bearish chart pattern on the four-hour chart threatens to trigger increased sell-off on the white metal.
The downward sloping RSI adds strength to the bearish chart, with the metal likely to plunge to the $24 handle.
Gold also remains under pressure after retreating from three-week highs. After touching highs of $1,755, the yellow metal plunged, taking out the $1740 resistance level on its way back to the crucial $1,730 support level.
Jerome Powell’s dovish tone and a downbeat FOMC report had initially sparked weakness in the dollar, sending gold to three-week highs. The rally was short-lived as gains in Treasury yields continued to pile pressure on the yellow metal. The 10-year yield rallying to 14 months high of 1.754% is one reason gold is retreating lower and looks under pressure at the start of the week.
Gold could remain range-bound as there is not that much macroeconomic data likely to influence dollar strength at the start of the week. However, several FOMC members, including Chairman Powell, are expected to make keynote speeches during the week.
The focus will be on Treasury yields that have remained resilient amid the dovish tones by FOMC speakers. On Wednesday, the market awaits the IHS Markit Manufacturing PMI figures’ release expected to show an uptick in business activity in the manufacturing sector.