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In the previous review we noted that tension between the various Euro Zone countries was increasing. Nations were split between calling for and opposing against an increase of the bailout fund. In the meanwhile China indicated a possibility of increasing the bank reserves ratio for 2011. A move considered by many investors as a negative setback to the fragile global economy. Technically, the line 1.34 is usually a strong resistance and hence caution must be employed.
In the EUR/USD daily chart above, we see a clearly bearish week for the currency pair. While the drop was sharp initially, the momentum slowly lessen to a ranging pattern testing the 1.32 line. Indeed the 1.34 line turned out to be a tough resistance.
Beginning of the week, investors struggled to come to terms with the worst than expected US Non-Farm Payroll data. The increase of the US unemployment rate brought concerns to many investors. Furthermore, Mr Bernanke of the US Fed mentioned the possibility of further quantitative easing. With a massive deficit already, will another round of QE burst the US’s pockets? The Euro Zone was also coming under increasing pressure to curb it’s deficit problems. While a Euro Bond was suggested, objections surfaced immediately.
As we approached midweek, an agreement by President Obama to a two years extension on tax cuts brought optimism back to the markets. The US Treasury sold it’s remaining stocks of Citigroup too. This gave investors the impression that the scars of the 2008 financial crisis are probably fading away. In Europe however things were not as good. Portugal was speculated to be the next recipient of a bailout and Greece’s budget deficit was reported to be among the highest of developed nations. A staggering 15.4% !
Midweek, news of an interest rate increase in China rained on the parade. Furthermore, investors were calling that the bank stress tests conducted by the Euro Zone earlier might be a failure as banks which “passed” are still being told to “shape up”. 1.32 was tested.
As end week approached, the EUR/USD continued to test the 1.32 region. The frequent testing suggested that the bias might be a bearish one. Fitch reduced Ireland’s long term rating and it would probably cause more risk aversion for the Euro Zone.
I always mentioned that investors see China as one of the main driver of the global recovery and hence any attempts by China to curb speculative growth may trigger a wave of risk aversion. In a recent report, it was reported that China’s inflation rose to 5.1% in November. In a country where some poor families spend as much as half their incomes on food, much must be done! Investors are probably speculating and worried about upcoming interest rate hikes by China.
Previously i mentioned that the Euro Zone bank stress tests may be failing to bring confidence to the markets and a close look at some figures does indeed seem to suggest that. It was reported that the S&P Financials Index rose 25% within 5 months of the publication of the US bank stress tests. On the contrary, within 5 months of the publication of the European Union bank stress tests results, the Bloomberg Europe Banks and Financial Services Index dropped 4 percent! A lack of confidence regarding the economic viability of the banks by investors is a dangerous sentiment.
The French and Germany leaders mentioned that they will support the Euro. Germany’s Merkel even said that if Euro failed, Europe fails. Having said so, it was maintained that the idea of expanding the bailout fund is not on the list of consideration for now. The Euro Zone crisis probably requires immediate action and hence the frequent debates may not be helping much.
From a technical point of view, while bounded between 1.32 – 1.34 for now, the frequent testing of the 1.32 support suggests a bearish bias. Should the market conditions remain so, we may be heading towards a retest of the 1.3 / 200 SMA region.
Next week brings us a number of important economic data. For example, the German ZEW Economic Sentiment and German Ifo Business Climate will give us an insight of Germany’s condition. Being a major player of the Euro Zone, this is crucial. US Retail Sales is due and likewise, investors will be interested to see how the US is doing. US Federal Funds Rate is also due and traders will probably monitor the release for clues to further economic policies. You can find the list of the various economic releases in the Economic Calender below.
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