The US dollar ended the week at it’s highest level since December 1st, and could be set for further gains in the run up to Christmas, as the US currency is increasingly viewed as offering better relative growth prospects now that the recent political uncertainty in the US has been resolved. Whilst falling US yields may offer some resistance to a gain in the dollar, the most significant effects are likely to be seen in the USD/JPY, which now looks to have hit resistance at the 84.50 price level, with the EUR/USD also looking increasingly weak, particularly following the shooting star candle of Tuesday which signalled the bearish end to the week on Friday. As such we can expect to see the euro dollar pair decline further next week, although the 200 day moving average may provide a temporary platform of support on the daily chart at 1.3100. However, if this level is breached then we can expect to see further bearish sentiment in due course, with a possible test of the low of late November at 1.3000, and a break here is likely to open the way to a move towards the 1.27 region in the early part of 2011.
In Europe, the economic picture continues to be dominated by the ongoing sovereign debt issues, and with no concrete agreement between EU finance ministers yet in place, this looks set to be a recurring theme into 2011, with confidence in the euro undermined as a result. At the centre of Europe sit Germany and France who are both opposed to increasing the size of the current EFSF ( European Financial Stability Facility), and as a result the market continues to worry as to whether there are sufficient funds available in the event of a default by one of the larger member states such as Spain, or indeed Italy. In the case of Spain, their current yields continue to remain high with investors concerned at buying more Government debt, and indeed the last bond auction was under subscribed. Should this situation continue, then the ECB would be required to step into the market, and in the last few weeks they have given several clear hints to the market that they are prepared to take whatever action is required in order to support any member state. What is less clear, is how long they are likely to continue with this policy once implemented, and until there is a clear increase in the EFSF, or clarification on any likely support for Spain, then the euro is likely to remain under pressure in the short term, particularly against the US dollar.
Moving to the UK, the economic numbers this week were mixed for sterling, and as such the forex markets tended to focus on the bad news rather then the good! The positive news centred on retail sales figures which were encouraging, counterbalanced with Unemployment which rose to 7.9% and Consumer Confidence which fell to its lowest level for 20 months. All this of course is against a the backdrop of a VAT increase which is due to take effect in 2011, which may impact larger purchases, further denting any fragile recovery in consumer spending. Next week of course sees the release of the recent minutes from the latest MPC meeting, who have very little room for manoeuvre as it worries about inflation on the one hand, which has now hit 3.3% in November, and a fragile recovery on the other, and as such leaving the bank in a very difficult position. The situation is certainly not helped by the VAT increase oulined above, which could bring any recovery to an abrupt halt, and with approximately 15% of UK exports going to EU member states such as Spain, Ireland, Italy and Portugal, the weakeness in these countries could hit the UK export market extremely hard. This issue is also apparent in the credit market, with Spain, Portugal and Ireland accounting for around 15% of loans to UK homeowners, with any banking collapse, as almost occurred in Ireland, having a significant knock on effect in the UK sector. So in summary, a very difficult period for the BOE which is unlikely to get easier in the next few months.
In terms of next weeks key fundamental news items, these are the important releases in the run up to Christmas and the end of another trading year:
Monday is a quiet day for tier one data, with none on Tuesday either, and the first major news item comes on Wednesday with Existing Home Sales, forecast at 4.72M, a small improvement on last months, 4.43M. The chart for homes sales continues to remain weak, with only small gains in the last four months following the collapse in August which saw the headline number fall from 5.37M in the previous month to 3.83M, which brought an abrupt halt to the trend of the last twelve months and the high of December 2009 which saw a figure of 6.54M
Thursday is a busy day with the release of Core Durable Goods, forecast to move to 1.7% from -2.7% last time, and this data is released at the same time as the weekly Unemployment Claims, which are forecast to remain flat at 421,000, so little change from last week’s 420,000, although the markets may be expecting a better number, given the holiday season and the prospect of part time work opportunities. The week effectively rounds off with New Home Sales, forecast to show a modest improvement from 283,000 last time to 301,000 this time, although with markets and traders winding down their positions ahead of the long holiday, Thursday’s price action could be volatile and unpredictable as a result.
There is no tier one data in Europe this week, and as a result the market focus will continue to be the sovereign debt issues outlined above, with concerns weighing on the euro once again.
For UK Sterling, the week gets underway on Tuesday with the release of the Public Sector Net Borrowing forecast to increase from 9.8B last time to a staggering 16.7B this time. This figure represents the difference in value between spending and income for public corporations, such as Central Government and Local Governments during the previous month, and if this is better than expected is generally good for the currency. In the last three months we have seen this figure fall from a high of 15.6B in September ( forecast 14.2B), to 9.8B in November ( forecast 9.0B), so this could surprise the markets if it is this far adrift of the forecast, so keep an eye out on Tuesday morning for this number.
Wednesday sees the release of the BOE, MPC meeting minutes, and the forecast split of members is expected to be 1-0-8 as forecast. At the same time we will also get the Current Account figures, expected to come in close to expectation at -7.5B, against a forecast of 7.4B, which brings the week to an end in terms of numbers for the UK.
On a personal note I will be trading all this week, and in particular watching the US dollar index for signs of further dollar strength. Monday may see some longer term trend trades on the EUR/USD, looking to hold the position down to the 1.27 level into next year, and the USD/JPY also look promising with a short trade, providing we see a break and hold below the 9 and 14 day moving averages as the pair struggle at the 84.25 price region. As always good luck and good trading and if you enjoyed reading this post then please click the ‘like’ button below, which would be much appreciated.