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FX: Big Week For Europe And Rest Of The World

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TODAY'S BIGGEST PERCENTAGE MOVERS

THE STORIES IN THE CURRENCY MARKET

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
12/13 Meeting 01/25 Meeting
NO CHANGE 64.0% 60.1%
CUT TO 0BP 36.0% 37.7%
HIKE TO 50BP 0.0% 2.2%

FX: BIG WEEK FOR EUROPE AND REST OF THE WORLD

For the past month, we have been waiting with bated breath for a solution to the European sovereign debt crisis but the only thing that we have had are opposition and roadblocks at every corner. This past week, the Eurogroup and ECOFIN failed to make any notable progress on the debt deal talks and this morning German Chancellor Merkel tried to manage everyone's expectations for the EU Leaders Summit by saying that the EU crisis could take years to resolve. She also reiterated her opposition to Eurobonds, which would have been a quick solution to the crisis if European leaders would simply agree to it. Unfortunately the options for the Europeans are not endless and Eurobonds have long been at the top of the list followed by a deal between the ECB and IMF. We are not very optimistic that much progress will be made on both, especially after Merkel's comments and the price action in the EUR/USD today suggests that other investors share our view as well. What will most likely happen is that the ECB will buy everyone time by cutting interest rates again on Thursday. The underperformance of the euro today can be attributed to the expectations for easier monetary policy and disappointing results from the EU Leaders Summit. Of course, when it comes to big meetings such as these that take place under such severe financial distress, anything can happen. European leaders could put their differences aside, bite the bullet and commit more funds towards the region's stability – this may appear to be a long shot right now but it needs to happen eventually.

DOLLAR TO TRADE AS A SAFE HAVEN NEXT WEEK

Next week, the dollar should trade almost exclusively as a safe haven currency because the U.S. is the only country without any significant economic reports. Non-manufacturing ISM, factory orders, the trade balance and University of Michigan Consumer confidence reports are the only pieces of noteworthy U.S. data on the calendar and with non-farm payrolls already out, non-manufacturing ISM will not be as market moving.

GBP: CONSTRUCTION ACTIVITY SLOWS

CAD: SECOND MONTH OF JOB LOSSES

USDJPY TRICKLES HIGHER ON STRONGER US DATA

The Japanese yen lost ground to the U.S. dollar while gaining on the euro, British pound and Swiss Franc. With the U.S. economy showing signs of improvement, USD/JPY tested the 78 handle during the early North American session. However, as the market turned back to the looming European crisis, the yen provided security to risk-averse traders. The declining global demands were reflected at the latest capital spending report published by the Ministry of Finance. In Q3, capital investment among Japanese businesses dropped by 9.8 percent compared to Q3 of last year. While Japanese firms showed strong resilience in bouncing back from the March disaster, the faltering global economy recovery pointed to a murky forecast. The pessimism added to the argument for a downward revision in the nation's Q3 GDP figure due out on December 9 th . To battle the slow recovery, some officials support a more aggressive role for the Japanese government. Yukio Edano, the Minister of Economy, Trade and Industry said that the country should turn to offensive policies and come up with a strong Japanese economy which is in balance with a strong yen. The trade minister urged the country to adopt a new type of economic and industrial policies with the focus on demand creation. He suggested that Japan would create new industrial areas to stimulate the potential demand, win the global demand and improve its energy productivity. Nonetheless, the country's economy remains vulnerable to the shifts in global demand in the short and medium term. Without the much needed resolution from the European leaders, the Japanese yen could appreciate further amid the increases in risk-aversion flows. Looking forward to next week, in addition to Q3 GDP number, we also expect leading index, machine orders, and trade balance reports on Wednesday, followed by Eco Watcher survey on Thursday.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD will be our currency pair in play for Monday. From the U.K., we expect Services PMI at 4:30 AM ET/ 9:30 GMT. From the U.S., we expect the ISM Non-Manufacturing index and factory orders at 10:00 AM ET/ 15:00 GMT.

While GBP/USD gave back some of its gains from earlier this week, the pair remained the in the range-trading zone which we determined using the Bollinger Bands. The nearest support sits at the lower first std. dev. Bollinger Band, 1.5546. Any further decline, GBP/USD could see major support at 1.5272, the pair's swing low in October. On the flip side, the 20-day SMA could contain the pair's rally at 1.5740. Further up, GBP/USD could see significant resistance at the 61.8% Fibonacci level – 1.5880. We drew our Fibonacci retracement from the low in December 2010 to pair's YTD high in April.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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