As someone who has had minimal exposure to the markets during the past month after a prolonged Christmas break, coming back to my desk today was a bit of a shock to my system. I had heard mumblings about USDJPY and EURUSD and huge inflows into equities since the start of the year, yet I arrive back the day things are starting to cool off. USDJPY fell 100 pips, EURUSD backed away from 1.34 and EURCHF failed to negotiate its next major resistance level of 1.24. Luckily for me I don’t believe that I’ve missed the rally completely, after all this is only the second full working week of 2013 and if rally only lasts a matter of days then it doesn’t say much about the so-called 2013 recovery story.

What to expect in the coming weeks

So what path may the markets take in the coming weeks? We may have been a tad too conservative with our EURUSD estimate for Q1 and may well be ripping that up in the coming weeks. 1.35 was our upper boundary, only 100 or so pips away from where we stand today. The failure to break above 1.3400 looks like a very normal pullback in our view and 1.3330 has acted as good support so far in the London session. The key driver of the stronger euro so far in 2013 has been 1, a moderation in sovereign debt concerns (Spain’s 10-year bond yield is hovering around 5%) and 2, the stance of the ECB, who seems reluctant to cut rates further and is not debasing the euro with QE. But the fundamentals of the currency bloc remain perilous. German GDP for 2012, released earlier today, was weaker than expected at 0.7% YoY, indicating an approx. 1% decline in GDP in Q4 2012. The major question for investors is whether this is just a bump in the road for the largest economy in the Eurozone or if it is the start of a more prolonged decline. There was some good news for the currency bloc also released this morning to help take the edge off, the trade balance jumped to EUR13.7bn in November from EUR 9.3bn in October. This suggests that the economic re-balancing may be starting to work, however Germany’s sharp jump in exports could be the chief reason for this jump higher rather than the troubled periphery. Thus, the data for the currency bloc may be underwhelming rather than disastrous, as long as it stays this way then we may see fundamental issues act as no barrier to a higher euro. But as we note, right now the stars seem to be aligned for the euro to strengthen, but there are still many pitfalls on the road.

Can USDJPY maintain its march skywards?

A stronger USDJPY has been on the trades of the year so far in the FX world. The 7 big figure rally in 2 weeks has been driven by government pressure to weaken the currency. This has helped to boost the Nikkei and led some analysts to forecast a jump to 100.00 or above in the coming weeks and months. It’s been a volatile session for this cross, which dropped nearly 100 pips at one point. The driver for the decline was an incorrect headline from a government official that seemed to hint that the yen had fallen far enough. It was soon corrected, but by then the damage was done. The sharp decline may have been exacerbated by some profit-taking ahead of 90.00, a key resistance level. The trouble with the yen rally in my post-holiday eyes is that it is being boosted by politicians and they are notoriously hard to predict. Thus, the yen is weakening but I would not be surprised to see a turnaround if 1, we get some market panic (potentially due to the US’s debt ceiling debate) and 2, the government and BOJ in Japan don’t follow through with even more potent measures to weaken their currency. Thus, USDJPY above 90.00 should be treated with caution.

Elsewhere, the pound has had a mixed performance today. GBPUSD is mostly range bound after CPI inflation was mostly in line. The stand out data points included a decrease in the core inflation rate to 2.4% YoY from 2.6% in November. The RPI also rose a touch to 3.1% from 3%, while annual CPI remained steady at 2.7%. The largest upward effects on CPI came from housing and household services, which rose 2% between November and December mostly from utility bills. Transport prices were also higher, while clothing costs fell by 1.5%, possibly due to the milder December weather last year. This data is policy neutral for the BOE, thus technical factors could be the biggest driver of GBP in the near term. It is currently testing a key support zone at 1.6060 – the 50 and 100-day moving averages. Below opens the way to 1.60 then to 1.5980. The sharp rise in EURGBP is also weighing on the GBP more broadly. EURGBP rose above 0.8300 today, although 0.8320 is acting as stiff resistance. This cross is looking overbought, so may be due a pullback towards 0.8290 then 0.8250 – the 100-hr sma – in the near term.

Ahead today US retail sales and Empire manufacturing will be in focus. Retail sales are expected to be fairly lacklustre, indicating that the holidays may not have reaped great rewards for the retailers. Look out for some Fed speakers on the wires throughout the afternoon, if you can drag yourself away from Lance Armstrong’s interview with Oprah…

One to watch: Gold

The yellow metal has rallied today, but it could run into trouble around $1,695 – the 50-day sma and a key resistance level – in the short term. The gold price is particularly interesting as it has not joined in with the overall rally in risk since the start of the year.  Instead it has moved sideways. Ben Bernanke’s comments yesterday that “significant inflation” will not be the result of Fed policy action is also gold negative as the yellow metal is a traditional inflation hedge. If we get weak retail sales from the US today that could also weigh on the prospects for future inflation and may knock gold’s recent rally.  Thus, from both a fundamental and technical perspective we see the potential for a decline in the gold price and see it as a sell on any rallies towards $1,695.