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The markets opened this week with freshly disappointing news from China showing manufacturing levels have slowed for the third consecutive month. The HSBC and Markit purchasing managers index showed a reading of 48.1 in March, with anything below 50 indicating contraction. This was the lowest reading in eight months and signals the second largest economy in the world is suffering from weaker domestic demand. The question now being posed is whether China needs to take action to meet its annual 7.5% growth target. The Australian dollar initially fell after this announcement, but AUD/USD later bounced back to be 0.1% above the previous level at 0.9092.

Last week’s main move was in response to US policy makers’ announcement to lower the bond buying progam by $10 billion for the third consecutive month, followed by US Federal Reserve Chairwoman Janet Yellen’s surprise announcement that she expects interest rates to rise as soon as within six months of the completion of the tapering program. The market reacted sharply to this unexpectedly candid response with safe havens rapidly falling out of favour with investors. Gold dropped $6 an ounce and was trading at $1378 per ounce and the yen lost 0.2% with USD/JPY trading at 102.43.

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Currencies were trading steadily in advance of the Fed’s announcement, with the USD index rising to levels not seen since late February after Yellen’s announcement, and EUR/USD dropping to weekly lows paring all gains seen after the ECB policy announcement two weeks previously. The main US data releases this week are the Durable Goods Orders on Wednesday and the final revision of Q4 GDP, with the former showing the state of the production activity in the US and the latter measuring economic expansion. The previously recorded GDP rate was 2.4% and the revision is expected to be around 2.7%, however, any shock change in GDP is expected to generate volatility in USD pairs.

This week the euro kicked off European trading with early strength off the back of surprisingly positive French manufacturing PMI data. The reading of 51.6, up from 47.9 in February marks a return to growth for France’s manufacturing sector and shows the private sector is expanding at its fastest rate in 31 months. This positivity was short-lived, however, with data from Germany – the manufacturing powerhouse of the EU – revealing manufacturing activity fell from 54.8 in February to 53.8 in March, the slowest expansion in four months. The EUR/USD pivot point is 1.3797, with resistance levels at 1.3806, 1.3815 and 1.3824; and support levels at 1.3788, 1.3779 and 1.3770.

Last week the British pound experienced some weakness with GBP/USD falling despite the pair gaining from better than expected UK Jobless Claims data which saw the most people in work since records began in 1971. These gains were pared the same day in response to Yellen’s announcement about interest rates, with the pair moving below the 1.6500 support handle before levelling out in what was a relatively muted end to the week for the pair.

This week, attention is turning to whether the Bank of England (BoE) will tighten or loosen monetary policy with the latest Consumer Price Index data being released on Tuesday offering insights into the inflation levels. UK inflation fell in January to 1.9% from 2.0% the previous month and is expected to drop even lower to 1.7% this month. If the level jumps above 2.0% there will be a persuasive case for policy makers to raise interest rates and volatility on GBP pairs would be expected. The GBP/USD pivot point is 1.6486, with resistance levels at 1.6506, 1.6517 and 1.6537; and support levels at 1.6475, 1.6455 and 1.6444.

In Japan, the market is awaiting the arrival of the new sales tax which comes into force on April 1st and will see rates rising from 5% to 8%. This week’s retail sales figure is expected to be positively skewed due to many shoppers rushing to purchase items before the sales tax is brought in. The big question is whether the Bank of Japan (BoJ) will be forced to boost the stimulus further to ease the impact of the tax increase. The overall aim of the monetary stimulus is to try and boost inflation to 2% but if this target looks as though it is near impossible to reach, policy makers may be forced to boost the stimulus as early as next month, which would likely lead to further weakening of the Japanese yen. The USD/JPY pivot point is 102.23, with resistance at 102.35, 102.41 and 102.52; and supports at 102.17, 102.05 and 101.99.

The Australian dollar continues to feel bearish pressure in the wake of the Chinese manufacturing data, however there are no major data announcements due from Australia this week. Focus has instead turned to interest rates in Australia with many analysts forecasting that the strong employment numbers indicate a raise in interest rates is possible as early as within a year. This news is likely to help attract traders back to the Aussie dollar. The AUD/USD pivot point is 0.9096, with resistance levels of 0.9110, 0.9126 and 0.9140; and supports at 0.9080, 0.9066 and 0.9050.

What to Watch this Week:

While USD pairs continue to show some movement, there are no big news releases this week showing obvious signs of moving the market. GBP/USD may be a good pair to watch for volatility around the CPI announcement.

Further reading:  Recent Price Action Signals Discussed on Forex Crunch