Earlier this week the EUR/USD experienced a considerable rise touching highs of 1.3498 after opening the week with prices around the 1.3200 region. Much of the rise has been attributed to euro buying by sovereign entities which pushed the euro higher against the softer USD. Drastic moves closer to year end are usually attributable to thinning volumes, as market players hesitate to take larger positions.
News that the rating agency Standard & Poor’s could downgrade Belgium’s sovereign debt if it fails to form a new government, and a jump in yields demanded for a Spanish treasury bills auction last Tuesday however eased some of the euro’s support. Spain has scheduled another bond auction for today.
The recently proposed European bonds (E-bonds) solution is not expected to be on the agenda of the EU summit being held at the end of this week. Last week Germany and France joined forces against the idea of creating a European Treasury (along the lines of the US Treasury) as a longer term solution for the current eurozone debt problems.
It is feared that such a solution would probably reduce the pressure on individual eurozone nations to keep their fiscal positions in good shape and it would create a pool of funds for the “good” nations and the “worst” nations which could translate to higher funding costs for countries like Germany, to benefit the nations which are, relatively speaking, worst off when it comes to fiscal health.
Early this week the rating agency Moody’s warned the United States that if its current tax proposal is implemented there is an increased likelihood of attributing a negative outlook to the US’s “AAA” rating – this also weighed on the US dollar.
The renewed support for the euro also manifested itself in the EUR/GBP pair. The EUR/GBP rose from 0.8349 lows to 0.85 highs, which highs were reached in the earlier part of this week.
The cable found increasing support since the end of October as economic data out of the UK was generally showing signs of improvement and the fears of the BoE engaging in more quantitative easing was pushed away, at least for the time being.
UK house prices data showed that house prices fell three per cent over the past month, which data points towards a still weak housing market.
Analysts still expect further declines in the coming months but the declines are expected to be slower. The CPI (YoY) reading from the UK for November showed a small persistent rise despite a relatively weak economic growth. The MPC (Monetary Policy Committee) expects that the sluggish economic growth should eventually tame inflation back within target levels by 2012.
Analysts expect the EUR/GBP pair to remain rather neutral throughout the first quarter of 2011, ranging around the 0.84 levels. RTFX Trader Tip’s outlook for the week sees the pair heading higher; to the downside the pair finds support at 0.8312/0.8257, and to the upside resistance is seen at 0.8466/0.8566.
In Asian markets, Chinese inflation data, released over the weekend, revealed increasing inflationary pressure. This will likely make the case for more tightening measures. In fact an increase in the required reserves for Chinese banks, that was due to expire this week, shall be extended for another three months. China is committing itself to keep inflation under control in 2011, while it shall be taking measures to sustain economic growth.
China’s decision not to embark on aggressive monetary tightening too quickly, and instead opting for a milder form of monetary tightening for the time being, relieved investors and sparked some risk appetite.
The Aussie re-embraced parity again against the US dollar – the pair had already gone beyond parity earlier in November. The weaker USD at the start of this week generated gains for commodity prices and this was supportive of the AUD.
The USD/JPY pair traded in the range of 82.84-84.35 for the earlier part of the week. The weaker USD lent support for the JPY. Japanese industrial production figures released early Tuesday morning revealed a two per cent monthly decline.
Upcoming FX key events:
Today: EZ HICP, EZ PMI, UK Retail Sales & US Housing Starts.
Tomorrow: Switzerland SNB Interest Rate Decision, German IFO, EZ Foreign Trade & US Leading Indicators
FX technical key points:
EUR/USD is bearish, target 1.2900, key reversal point 1.3700.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is bearish, target 0.9400, key reversal point 1.0200.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.