The sentiment is undoubtedly bearish in the market and the selloff on Friday has left casualties across the board from equities, commodities and currencies, where the dollar, the yen and the gold emerged with the gains on the back of risk aversion and haven demand.
Into the European session today, majors are compensating their losses indulging in correction following the strong moves seen on Friday. The fear is still over the European debt crisis disarray which is progressing day by day and tarnishing the efforts by governments and policy makers adopted to rest their markets and economies ashore on the back of the financial crisis.
The global economic recovery is at risk and that was highlighted clearly by the vast differences among G20 finance chiefs over the weekend in South Korea. They disagreed over a number of issues from the means to approach the crisis to the steps to preserve growth and sustain markets' confidence; nonetheless, the one fact they surely agreed upon was the fact that the recovery faces significant challenges.
We hold onto our negative sentiment expectations for this week which is likely to dominate the market in bearishness and do not take into the correction that is undergoing in the market after the heavy moves seen in the past couple of sessions.
Starting off with the biggest loser, the single 16-nation currency; the euro endured heavy losses on Friday and today is only recuperating after heavy selling. Though the French Prime Minister was ecstatic about the euro's breakthrough below the $1.20 threshold which rallies support to exports, still it is not pleasant to markets and does not reflect positive fundamentals from the area. Geithner is surely not glad with the matter at all, you can call it envy since US exports are going to be hit by the raging dollar, yet reality is he did highlight a serious formulating problem which is an export led recovery which places the global economy at a more fragile position and vulnerability to risk since the spreading agony eventually will hurt demand across the globe.
The euro rebounded off lows today at 1.1874 from oversold areas to now reach the highest recorded so far at 1.1991. We still see mixed signals especially over intraday basis, were over hourly basis the pair is reaching overbought areas while over four-hour basis activated the positive crossover on Stochastic from oversold areas. We see the likely hood for the correction to continue slightly, though there is highly volatile amid mixed signals yet overall remain bearish since the pair is steady below 1.2040 where as far as trading is below 1.2140 we remain bearish on the euro.
Surely the market is adjusting, yet we surely believe that the sentiment has not changed dramatically as anxiety dominates the market. The dollar also initiated the correction trading off highs set at 88.70 to now trade at its lows of 88.19. The negative crossover on momentum indicators has been activated Stochastic over four-hour basis and surely its needed to retest the breach of the strong resistance areas around 87.45 which the index finally breached on Friday after several failed attempts. The index must conclude a successful retest to confirm the bullishness.
Sterling raced to the upside after touching the low of 1.4386 powered further by the need to cover the bearish opening gap. The pair is currently trading at its high around 1.4488 after activating the intraday positive crossover on Stochastic over intraday basis. Nonetheless, the rebound is merely correction and we expect excessive bearishness to be witnessed for sterling over the coming period especially after Cameron said that the debt crisis in the Kingdom is actually worse than anticipated signaling hefty change in fiscal and expenditure polices for time to come. And actually if I would speculate further down the road, it will likely be the cornerstone in the Conservative-Lib Dem conflict which undermines the prospects for this untraditional coalition to continue into its full term!
On the other hand, the Japanese yen was not excluded of the equation as it too indulged in a correction after the strong movement particularly on Friday. The sentiment surrounding the Japanese yen is very mixed where haven demand and risk unwinding will likely prevail in the coming period and send the yen higher which in role will ignite further woes especially as the new Prime Minister is very much an advocate of a weaker yen. The pair rebounded strongly off lows set today at 90.96 returning to opening levels setting the high of 91.93 and currently trading around 91.80 levels. The pair reached overbought areas over intraday basis and Stochastic over four-hour basis activated the negative crossover signaling the continuation of the movement south.