The currencies market has been trading calmly and within a tight range since this morning, as the European session provided nothing new to its predecessor ahead of the US entry to the market.
Some are tending to call this week an optimistic one, since investors head to the risky assets and higher yielders, pushing commodities and currencies higher alongside equities and on the expense of the dollar.
Well, if that is the case, then it surely destroys the theory of haven demand and aversion, since last week was generally devastating for the market and despite the prevailing jitters the dollar ended with heavy losses opposed to gains. This week the trend continued and greenback is about to end with the second consecutive weekly loss, and generally we can surely say that the correction started from early June after the new set peak from where the dollar crumbled.
Our dollar assessment is based upon the dollar index, which to us is the most reflective to the market since it gauges the six major currencies which the market tracks the most. The dollar index currently is trading unchanged around opening levels of 83.71 at 83.77. On the week, the dollar is trading lower from opening areas of 84.34 and off highs recorded early in the week around 84.81 and currently around aforementioned areas of 83.70s slightly off lows seen so far at 83.61.
If we are to be frank, we are surely gullible to call the move in the market optimism, for it is getting dull mix and matching between optimism and pessimism day in and day out, while reality is the market is transforming. On the other side, it will be limited in theory to call the movement merely a correction; reality is that the conditions are a mixture of both, the market seriously needed the correction and the sentiment change, I again refuse to call it optimism for it is more of unwinding of pessimism, and we should not alter that sentiment until crucial signs of reversal are seen, for as far as I am concerned the general sentiment for now in the market remains bearish!
The euro and the pound are the center points to my argument. The pound started the upside journey versus the dollar and opposed all expectations, yet reality is the market was unwinding the pessimism over the UK outlook, especially as they priced in a longer and deeper recession alongside the political void, where the economy's rebound so far proved to be stronger than expected, while the coalition government also surprised everyone in starting steady steps to take the nation off its feet!
In fact sterling started to rise off the lows hit around 1.4220s around the time the UK new government started to form, which opposed the fears before that Conservatives are going to be the bad ballot for the economy. Sterling continued its upside recovery despite the announced new spending cuts, the most since WWII for the kingdom; yet the market still is working the effect of the past negativity on UK and still have not started to look onto the future, they are revising the now to the upside which was yesterday's gloomy future.
Accordingly, sterling is no difference to what is seen for the dollar nowadays, its merely the opposite, and if you want my opinion, though I believe the gains will extend for sterling now, the outlook is to include more bearish tendencies as the market starts to take the effect of the downside pressures from the sluggish economic state and the new austerity measures.
Sterling rose of the aforesaid bottom around 1.42 areas to the highs reached this week around 1.5240s. Today sterling was trading marginally lower versus the dollar, pushed by the unexpected widening of the trade deficit, which signaled waning demand, especially European, amid the debt crisis and awakening the fears over the outlook for growth.
Sterling is trading around 1.5157 after recording the high of 1.5203 and the low off 1.5129.
We explained the situation with sterling and the UK economy because we think it is the same scenario that is starting to be implemented on the euro. The market as Trichet perfectly described yesterday is too pessimistic which is now why the euro is recovering as investors saw that the worst they were pricing is not on the way to realization, helping pull the single 16-nation currency out of the gutters. The euro is much stronger at current 1.26 areas compared to the bottom so far hit at 1.18.
Today the currency is trading also within a tight range hovering now around 1.2668 after recording the highest of 1.2722 and the low of 1.2659.
We are surely going to be witnessing extensive and heavy volatility over the coming period as investors revaluate their estimates for the outlook, whether it was for the recovery or for the crisis. That is to be reflected the most on the dollar, the euro, gold and the yen which is why we advice keeping a check on those among all other instruments for they are not excluded at all as the revaluation will include all from equities to currencies right passing though bonds and commodities, so place safe investment strategies and do not rush into the market with guarantees just yet.