The Sterling and euro fell heavily against the dollar on a combination of poor data and dollar strength. Dollar strength came in with a bang in 2014 after limping into the end of 2013.
The Sterling dropped more than 145 pips against the greenback after traders determine that the Bank of England (BoE) is in no hurry to rise interest rates. The manufacturing PMI data out of the United Kingdom fell below expectations, although still elevated. December’s print was 57.3 opposed to a revised 58.1 in the previous month.
GBPUSD fell immediately after breaching 1.6600 and broke through 1.65 before finding support at 1.6408. Price action will potentially find some near-term resistance at 1.6450. A pullback to 1.6470 is likely, too, given the dramatic free fall. However, it looks as if there is a trend change if the dollar can continue to hold onto gains. Look for a drop to 1.6365.
The European PMI data was mixed with Spain and Italy on top and France on the bottom, missing expectations. However, there looks to be major profit taking on the euro’s massive 2013 rally making it the best performing major currency in 2013. The EURUSD is at multi-year highs while economic and political stability is still an issue. This divergence will likely begin to converge in 2014. “There’s a gravitational pull based on the yield differential that moved about a week ago. That’s a fundamental anchor, and I think that, as people get back to the desk today, they’re probably trading based on that,” according to Dan Dorrow, head of research at Faros Trading LLC.
The EURUSD will find price action support at 1.3650 and 1.3620, while near-term resistance is found at 1.3675. There is a multi-EMA bearish crossover in the works. The 20 EMA is looking to converge into the 50 and 72 EMA, and this will likely continue the bearish movement. The EURUSD can move lower, and price action suggests 1.3540.
There bearish scenario in last week’s “Euro Gets a Push from Weidmann, is 1.4000 in the Future?” I suggested that if the EURUSD could not close above 1.3813, then the pair would fall to support near 1.3670/81. It fell through these levels, and it is now acting as resistance. In this analysis piece, I said the euro could drop to 1.3550, and this is still in play.
On December 4, 2013, I initiated a target on the USDZAR of 10.6060, and the pair traded through these levels in response to the weaker than expected Chinese manufacturing PMI. The South African rand traded to its lowest point against the dollar since 2009.
The rand took a hit because 12 percent of South African raw materials are purchased by China, and if manufacturing continues to slow, then a cut in purchasing could result. The USDZAR is volatile and can easily move 300-400 pips per day. Traders that were bullish should take a bit off, and reevaluate for reentry. The emerging market currencies could continue to trade lower on dollar strength.