EUR/USD
Further gains for the euro are expected towards the Feb. 2 reaction high at 1.3862. The wave equality target at 1.3824 has been keeping the underlying tone positive and the 1.3862 peak marks the highest point of a recently completed bull flag/wedge pattern on the daily chart. The positive wave structure of the strong recovery off Tuesday's 1.3525 low creates scope for the 1.4000 area in the coming sessions. Corrective downside risk is limited to Thursday's low at 1.3704.
GBP/USD
Thursday's failure to force a break through the key 1.6277/1.6298 resistance area will concern GBP bulls. Action since the Feb. 3 reaction high at 1.6277 can be confined within a bullish continuation pattern, although this means there would be scope for a return to the Feb. 11 reaction low at 1.5964 on a break below 1.6075. Regaining ground above 1.6211 is required to bring the focus back onto the 1.6277/1.6298 resistance area.
USD/JPY
The corrective recovery off 81.62 is likely to be short-lived and limited to the 82.50 area. Resistance at 82.32 will look to protect 82.50 and prompt a return to the 81.62 low, which is close to crucial support at 81.50. The support line of an effective four-month bear pennant consolidation pattern lies at 81.50, which is protecting the Feb. 4 reaction low at 81.10.
AUD/USD
Extends the recovery off Wednesday's low at 0.9982 to bring the focus back onto the Feb. 18 high at 1.0160. A three-week bull pennant continuation pattern can be discerned on the daily chart and to provide a short-term boost, a break through 1.0160 would create scope for 1.0201 and the Dec. 31 reaction high at 1.0258. Good support lies in the 1.0060 area and only forays below there would concern bulls.
FOREX FOCUS
Watching the euro is like watching a rabbit caught in the glare of the headlights as stagflation comes rumbling down the road. The single currency just isn't sure which way to hop. On one side, the European Central Bank is well placed to respond to higher inflation. As analysts point out, the ECB can tighten monetary policy much more quickly than the Federal Reserve, which is mired in heavy doses of quantitative easing that will take months to unwind. On the other side of the road, however, is the problem of growth. Not only would higher rates increase the risk of a sovereign default but civil unrest, of the type seen in Greece this week, would become more widespread. Stagflation has started to loom large as the price of crude oil has rocketed on fears that the "Jasmine revolution" sweeping the Middle East and North Africa will disrupt production. Libyan output has already been impacted, helping to send the price of Brent crude to nearly $120 a barrel earlier Thursday. And the rally in crude prices isn't expected to stop here. Demonstrations in Bahrain and Saudi Arabia will only increase geopolitical tensions and raise fears of an even greater oil shock. A study by Goldman Sachs highlights the risk of disruption to Europe's gas supply from North Africa and the impact this would have on wholesale power prices, especially in Italy, Spain, Portugal and the U.K. As for most other major economies, this couldn't have come at a worse time for euro-zone and European Central Bank policy makers. Not only is growth in most parts of the region still very fragile, but Germany, the strongest of the core countries, would be most exposed to higher energy costs. Carsten Brzeski, senior euro-zone economist with ING Financial Markets in Brussels, summed up the problem for Germany: "The biggest threat for the German economy currently comes from oil prices. Energy- and food-driven inflation could choke off the consumption recovery before it actually gets going."
EUROPE
Sterling came under pressure across the board Friday after data showed that the U.K. economy had contracted more than previously thought in the fourth quarter, while the euro also sank despite a general improvement in global risk appetite and retreating oil prices. Data showed that the U.K. economy shrank by 0.6% in the last quarter of 2010, compared with an initially estimated quarterly drop of 0.5% in late January, pushing the pound lower against the dollar and scaling back expectations of three rate increases by the Bank of England this year. Rate analysts now predict only two BOE rate increases in 2011, with the third one pushed forward to February 2012. "Today's figures show that the performance of the economy was even worse than we initially feared," said Hetal Mehta, a U.K. economist at Daiwa Securities in London, adding that expectations for a rate rise in May will be influenced by first-quarter 2011 GDP figures. "Only if the economy expands by around 0.6%-0.7%, to take GDP back to third-quarter levels, do we think that the MPC [BOE Monetary Policy Committee] would consider a May rate hike. In our view, this is an unlikely scenario," Mehta added. The euro was well bid early in the session against the safe-haven Swiss franc, as global risk sentiment improved from Thursday and oil prices eased back from over two-year highs. "The franc would suffer acutely were the markets to suddenly become more relaxed, or to become increasingly inured to the news flow regarding Libya and the like," said Daragh Maher, a currency strategist at Credit Agricole in a note to clients. The franc managed to claw back most of the day's losses, however, after a strong Swiss February KOF survey index rose to 2.18, above expectations of 2.08, giving the currency a lift. Oil prices remained in focus during the session after easing off the two-and-a-half year highs reached Thursday at $119.79 a barrel. This benefited the Australian dollar and its Canadian counterpart as well. The dollar was cautiously higher across the board, but struggled to sustain gains against the Japanese yen. The softer greenback tone wasn't helped Thursday, when the St. Louis Federal Reserve President James Bullard said that a third round of bond buying wasn't "totally off the table."
ASIA
The euro rose to its highest level against the dollar in more than three weeks in Asia Friday, as investors bet the European Central Bank may sound a more hawkish tone at a meeting next week amid mounting inflation expectations. Dealers said investors will be watching Germany's provisional consumer price index data for February due later in the day, as well as other European economic indicators. Strong results would likely buoy the euro further by increasing expectations for the ECB to move toward an exit from its easy monetary policy in the nearer term, they said. The common currency is also benefiting from the perception it has less to lose than the dollar from the turmoil in the Middle East and North Africa, dealers said. The U.S. is perceived as the major outside backer of governments in the oil-rich region that are being challenged by rapidly spreading popular protests. Washington has been put on the defensive, dealers say. Speculation that future governments in countries like Egypt could be less accommodative to U.S. interests highlights the risk of waning American power, a negative development for the greenback, they say. "Dollar assets are looking riskier due to the turbulence in the Mideast and North Africa," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corporation. "The developments there add to the view that U.S. power is waning." Continued speculation that any intensification of anti-government protests in Saudi Arabia and other oil-rich Middle Eastern nations could send oil prices higher is also hurting the dollar while benefiting the euro, dealers said. While the higher oil prices threaten to cool the U.S. economy, "the effect in the euro-zone is more noticeably to raise inflation expectations, which makes it seem all the more certain that the ECB will raise interest rates before the Federal Reserve," said Hideki Amikura, a deputy general manager in the foreign exchange section of Nomura Trust and Banking.
WORLD
The dollar fell broadly Thursday in New York as traders opted for the safety of the Swiss franc and Japan's yen amid ongoing turmoil in the Middle East and North Africa. Meanwhile, expectations for widening interest-rate differentials pushed the euro to a three-week high against the dollar. The dollar sank to a record low against the franc of CHF0.9234 as violence increased in Libya and fears increased that unrest in the Middle East could spread to more oil-producing nations like Iran and Saudi Arabia. "We continue to focus on the issues in the Middle East," said Aroop Chatterjee, chief foreign exchange quantitative strategist at Barclays Capital in New York. "Even though we've seen a bit of stabilization in oil prices, in the currencies market, [investors] still favor safe havens." The franc has become the most popular safe-haven option during times of geopolitical risk. It also rallied against the euro Thursday. The yen also was bid higher against the dollar and euro thanks to its perceived safety. Oil prices climbed above $100 a barrel early in the global day on the New York Mercantile Exchange, leading to the dollar's record weakness against the franc. But even as oil prices have backed off that lofty level, currency investors continued to favor safety. The situation in the Middle East appears to be far from stabilizing, so the flight to safety is likely to continue, analysts said. "If Iran or Saudi Arabia become unglued, it could get much worse," said John McCarthy, managing director of foreign exchange for ING Capital Markets in New York. There have been protests in recent days in both Saudi Arabia and Iran, but nothing approaching the levels seen in recent days in Libya. A bigger disruption in oil supply could severely hinder global economic growth. Libya accounts for about 2% of the world's oil production, while Iran accounts for about 5% and Saudi Arabia nearly 12%
