The euro continued where it left off at the back end of last week, and sold off aggressively hitting a seven-week low against the dollar on Tuesday. The single currency was mounting a strong comeback to start the week off on Monday, and was on its way to reversing losses suffered on Thursday and Friday of last week. However, fears over a political deadlock in Italy following the weekend’s elections reignited concerns over the region’s debt crisis.
Markets fear a return to power of Berlusconi
Last week, minutes from the Federal Reserve FOMC meeting in January said that “many participants” were worried about the potential risks of continued asset purchases and feel the need for the Fed to slow down or stop its bond buying program, even if employment does not pick up.
EUR/USD fell from its weekly high of 1.3434 to close the week below 1.3200. On Monday, the pair staged a comeback and traded higher to 1.3318, but the rally proved to be short-lived as it suffered its steepest one-day drop since the beginning of the year, to close at 1.3062. It extended its decline on Tuesday, to a seven-week trough by 1.3018 and edged closer to its 2013 low by 1.2997.
The common currency also suffered its sharpest decline against the Japanese yen since May 2011. It fell to a one-month low on Monday, and has steadily retreated from a three-year high throughout this month. EUR/JPY fell almost 650 pips to 118.76 on Monday, from 125.22 as forex investors fled towards safe-haven assets.
Inconclusive results from an Italian election over the weekend sparked a global risk sell-off at the start of the week. Global equity markets were mostly in red while Italian bond yields jumped higher.
The leader of the centre-left bloc, Pier Luigi Bersani, who won a narrow majority in the lower House, is running on a pledge to continue with the current budget rigor, while Silvio Berlusconi is promising an end to the tough austerity measures. Markets therefore fear a return to power of Berlusconi, which could stall economic reform and rekindle fears about heavily indebted countries in the region, in particular Spain and reverse optimism that the worse of the crisis was over.
The fiscal situation in the US also came back into focus at the start of the week, which also weighed on risk sentiment. President Barack Obama and congressional leaders remained deadlocked on how to avert $85 billion of automatic government spending cuts, which would come into effect, if a deal was not reached by March 1 (tomorrow) and could seriously dent any hopes for an economic recovery.
At the time of writing, forex investors were awaiting a key congressional testimony by Fed chairman Ben Bernanke. Markets were anxious over the tone the Fed chief will adopt in his testimony as US policymakers debate on the possibility of withdrawing stimulus earlier than anticipated. A dovish tone by Bernanke could see the greenback pare some of its recent gains, with many forex analysts starting to anticipate that a pullback from its recent rise against the yen may as well be on the cards.
The greenback rose more than 800 pips against the yen so far this year, and although a new Bank of Japan Governor is set to be appointed very soon by Japanese Prime Minister Shinzo Abe, the market has already priced in the fact that the new Governor will be more prone to adding more stimulus.
USD/JPY opened higher on Monday and rose to 94.36, close to its two-and-a-half year peak of 94.46, as rumours surfaced that Haruhiko Kuroda will be appointed by Abe to continue in the Government’s yen weakening strategy. As risk aversion kicked in, the pair suffered its steepest drop in almost three years and fell more than 300 points to 90.89.
The British pound came under increasing pressure before markets closed last week, and opened the week sharply lower after credit rating agency Moody’s cut Britain’s sovereign credit rating to Aa1 from Aaa.
Sterling fell to its lowest level versus the dollar since July 2010. GBP/USD fell to 1.5087, while EUR/GBP traded temporarily above 0.88 pence on Monday before it plunged to 0.8576 following the political uncertainties from Italy. This week’s final GDP figures from the fourth quarter will shed more light on the health of the British economy and will provide further insight on the pound’s fate in the near to medium term.
Upcoming FX key events:
Today: German Unemployment, EZ CPI & US GDP.
Tomorrow: EZ Unemployment Rate, Canadian GDP & US ISM Manufacturing.
Technical key points:
EUR/USD is neutral.
EUR/GBP is bullish target 0.90, key reversal point 0.8579.
USD/JPY is bullish, target 95.0, key reversal point 83.90.
GBP/USD is bearish target 1.50, key reversal point 1.5466.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
trading@rtfx.com
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only. This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision.
Any opinions expressed in this document represent the views of RTFX at the time of preparation. They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Emman Xuereb is a trader at RTFX Ltd.