A euphoric victory celebrated and yesterday’s hangover completed, has lead us to an FX market treading water, ahead of a BoE and ECB monetary policy rate decisions later in this euro session. Yesterday’s Greek parliament vote in favor of an austerity package has helped calm some market nerves ahead of this weekends parliamentary vote on next years Greek budget. If the budget is successfully passed, it should unlock the euro purse strings and provide the next tranche of much needed financial aid Greece so desperately requires.
If that is not enough to currently contend with, the market is always capable of providing excuses of other event risks, custom fit for any investor and their portfolios. Market participants are expected to have the "fiscal cliff noise" ringing in their ears until U.S. politicians are able to compromise on the situation and come to an agreement. Even the changing of Red Guard in China has all asset classes on alert. Theirs is another week long market event risk that will result in the world’s second largest economy unveiling its own new leadership. If nothing else, an investor can use one of these template reasons to cover off an unfavorable portfolio outcome.
On the EUR plus side this morning, Spain has completed its funding plans for this year with a bond sale today. With three more tenders on their books, Spain will be able to get a leg up on next year's needs. Testing times are expected globally in 2013 and any head start on funding requirements is a good start. The EC comments that Spain, France and Italy will miss next year's budget targets has many speculating that this should bring the Iberian giant closer to requesting a EU bailout. However, deny, deny and deny is Spain’s current stance on handouts and very much a single unit negative. Prime Minister Rajoy wants to be certain that activating the new euro bailout mechanism improves their borrowing costs. Spain not looking for aid suits a bearish market.
First up on the monetary rate decision is the BoE. Analysts expect policy makers to keep both the level of asset purchases and the base rate unchanged at this morning’s meet. MPC member comments over the last few months would suggest that the member majority is leaning towards a pause in AP, especially now that the U.K. economy is supposedly improving. The recent release of an aggressive upside surprise in Q3 GDP and the ongoing improvement in the labor market, coupled with the reduction in funding costs does not require any hasty decisions by committee members. FLS looks to be working and it’s this that should have a major effect on the shaping of future policies. However, the program requires more time.
Later and across the English Channel, the ECB has the same decision to make. The consensus sees no more easing from the eurocrats just yet, and no more promises of easing either, for the moment at least. Draghi is expected to do the same song and dance; non-committal but leaving the rate door ajar. He should acknowledge that the euro activity data have deteriorated, but no imminent mention of further rate cuts this side of 2012. Even so, everyone and their mother will be watching how FI dealers price in further ECB cuts down their curve, again adding weight to the EUR outright.
The overnight EUR market continues to consolidate, albeit at lower levels this morning. It’s another sign that this market may be temporarily oversold. The bears need a strong excuse to ignite the single unit negativity flame. If anything, and assuming that the negative momentum is done for the time being, it has the specs slowly requiring EURs ahead and around 1.2730-40 for another run to the topside, back towards the 10-DMA around 1.2868.