18/9/2012 - The Current Market Sentiment

By Roger Baettig | September 18 2012 3:41 AM

The single currency could make another jump yesterday reaching 1.3170 but it could not get over its previous resisting level at 1.318 and it is now trading below 1.31 not away from being exposed to a profit taken wave after its recent strong rally while the worries about the EU debt crisis can rise again weighing down on it after it could take its breathe over 1.30 psychological versus the greenback after diving below it had started in the middle of last May reaching 1.2041 on 24th of last July whereas it could form its bottom to the current levels thanks to the Fed's open ended QE3 and the Fed's cheeriness of having better economic activity and positive effects in the labor market with it's new stimulation plan which encouraged the risk appetite weighing down on the greenback.

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From another side, the European economy is still looking in the sake of trust while the risks are looming around its banking sector which looked this week far from being recapitalized by lowering its current leverage despite of 2 LTROs round of delivering 3 years loans on 1% interest rate yearly for propping up this sector avoiding a collapse of it in the beginning of this week can cause a panic and a disorder wave selling of its holding of assets which reached after these 2 rounds at the end of last July 34.4 trillion euros rising by about 7% yearly while the EU lenders' pledge last year was cutting this holding before these 2 rounds by 3%.

The IMF has seen previously this year that this required deleverage for sustaining the financial position of the EU banking sector can be with cutting the current EU lenders holding of assets by 3.8$T while it seems that the banks have another way loading more risks instead of unfolding the current holding looking for better market stance and hopes for recovery can drive up the prices lowering their loses and that can lead to a bigger risks and also can push directly the ECB to impose a third round of LTRO, If the economic conditions are not to improve at required pace at the maturity.

In this same time the inflation in the EU is still looking stable above the 2% yearly target of the ECB which is still expecting this rate to come below 2% later next year which is not hoped by these banks which are still loading holding risks for the future by God's will.

Now and after this extended rally of the single currency, the market are waiting tomorrow to know more about the current economic activity with the flash reading release of Sep EU manufacturing PMI which is expected to rise to 45.5 from 45.1 in August and EU PMI service figure of September which is also expected to show improving rising to 47.5 from 47.2 August well below 50 in the contracting territory.

By God's will, in this same time and in the case of facing a profit taken wave, the single currency can meet after this rally a psychological supporting level at 1.30 l and the breaking of it can open the door for testing lower supporting levels at 1.2855, 1.2753 while keeping its rising way versus the greenback can be faced by resisting levels at 1.318, 1.3282.1.3384 before 1.3485 again whereas it has formed its lower high on 24th of last Feb after forming a bottom at 1.2623 on 13th Jan of this year which came as an end of a down channel has started from 1.4245 on 26th of last October 2011.

Kind Regards

FX Market Strategist

Walid Salah El Din

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