Headlines from the EU dominated Forex trading last week. The main movers were Friday’s EU Summit and Thursday’s ECB Interest Rate Meeting. The EU Summit ended with an agreement from the 17 euro using countries to install stronger fiscal guidelines, as well as methods of enforcements. In addition, the countries agreed to greater monetary integration and a speedup of the proposed bailout to assist the troubled financial system. The Summit pact occurred after the ECB stated on Thursday that it would continue to purchase assets of sovereign debt to help drive yields lower. However, the ECB held back from making any promises to be aggressive in supporting debt prices, or printing new money to add liquidity to troubled banks (Our full comments on the ECB can be found here: ECB Fail).
With the EU Summit past us, Forex traders may begin to put their attention on the U.S. economy, specifically, the results of the holiday shopping season. So far, sales are moving at record levels, and have has provided optimism for a strong 4th quarter in the U.S. economy.
USD
Following interest rate meetings from five key central banks last week, the FED is slated to hold its FOMC Meeting on Tuesday. Forex traders will be awaiting comments from the FED about the FED’s participation in the coordinated central bank actions of two weeks ago as well as their economic outlook. At SwiftTick, we are most interested in their opinion of the effects of EU’s economic slowdown is having on the U.S. (more on this from Reuters). Also, we are watching whether the FED has raised its outlook on the employment sector following last month’s increases in Non Farm Payrolls. If the FED increases it signs of concern towards the US’s economy it will raise expectations among Forex traders that the central bank will initiate further rounds of monetary stimulus. Such actions could send the Dollar lower versus other safe havens such as the Yen and Gold.
EUR
After the above mentioned EU news, Forex traders will be focusing on the effects of last week’s actions. As of last Friday, initial reactions towards the EU’s integration were positive, which caused the EURUSD to trade off its lows. However, over the weekend, commentary has been more critical, with multiple articles from the WSJ questioning the plans. As such, Forex traders will continue to be focused on bond yields for signs of confidence in the EU’s initiatives. Rising yields will reveal that investors are questioning whether last week’s actions were enough to stave off the debt crisis and could send the EURUSD trading lower. Our opinion is that the EURUSD will likely continue to rally next week. This belief is based on the overall notion within Forex trading that currencies tend to strengthen during times of clarity. Therefore, with euro using EU leaders voting unanimously to support the continued efforts of keeping the Euro intact, bodes well for increasing positive sentiment towards the euro.
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GBP
Forex traders will be looking ahead to Tuesday’s U.K. CPI figures as well as Wednesday’s Employment Change data. Also in focus was the UK’s vote against participation in the EU’s new financial treaty. The question going forward is whether the non-compliance will affect the UK’s relationship with its largest trading partner. As the chart shows below, the GBPUSD is currently trading in a nearly two week trading range between 1.5565 and 1.5755. As such, reaction towards the coming week’s data as well as reaction to last week’s EU Summit could cause the pair to finally trade out of it range. Such a move could trigger a breakout move in the GBPUSD as Forex traders jump into the pair’s new direction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
