Euro Falls to Lowest Levels in 2 Years on Broad US Dollar Strength
Market volatility increased last week (on a trend basis) as investor sentiment was negative at the Monday open. This came largely as a result of the weak Non Farm Payrolls out of the US that were released previously. A weak labor markets in the world’s largest economy is keeping stock markets near their recent lows but this did start to change in the middle of the week as markets began to speculate on further interest rate reductions in several areas of the world. This speculation came after the previous rate decreases in Europe and China and analyst expectations are now showing that this trend will continue in China after last week’s poor quarterly GDP figures.
The quarterly GDP numbers out of China showed that the national growth rate is now at the lowest levels in 3 years, at 7.6%. This was lower than the consensus estimates of 7.7% and a sharp decline from the 8.1% that was seen in the previous quarter. Given this significant trend weakness, it is becomingly increasingly likely that the Chinese central bank will need to make monetary policy less restrictive in order to prevent further growth deterioration. This speculation was enough to bring buyers back into stocks and high yielding currencies so that prices posted gains on the week.
Markets at Inflection Point with Euro at Significant Lows
But even with the late rallies and positive close last week, stock markets and high yielding remain well below their medium term averages and the Euro itself is now seen at its lowest levels in two years. Given this weakness, there is some some prospect here for a corrective bounce and this could come as a result of the macro economic data releases that will be coming next week. These releases will include Advanced Retail Sales figures, and the Consumer Price Index on Monday and Tuesday, which is also when Fed Chairman Ben Bernanke will give a speech to Congress.
The data does tail off into the close of the week but we will still see Existing Home Sales, Leading Indicators, Beige Book and the Philadelphia Fed Survey. Markets are currently seen at a major inflection point, so the specific performances seen in each asset class during next week’s spread trading will be very important for determining how markets are likely to proceed for the remainder of this quarter.
The EUR/USD continues to push lower as it remains caught in a long term downtrend channel with very little in the of support seen to the downside. Markets are likely to remain fixated on psychological levels, making the next target the 1.20 region. Risk to reward ratios, however, favor bullish positions as a corrective bounce is becoming more likely. To the topside, initial resistance comes in at 1.2390, as this was a previous support level. A break here would turn the short term bias back to consolidation.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.