Weekly analysis

on February 01 2013 9:02 AM
Europe
European markets rose Wednesday following global cues but investors remained watchful about the debt crisis lingering over the euro zone. REUTERS

 

Euro takes flight

This week the euro continued on its march towards the 1.4000 level, while the Japanese yen continued to weaken against almost every major currency.

The moves were of course driven by the fundamental events of the week, which included a surprise contraction on US economic growth. GDP contracted by  -0.1% as opposed to the anticipated 1.1% level that the markets were expecting. 

In the eurozone, Italian bond yields were at their lowest level for 2 years, indicating that investors are finally starting to become less concerned with the financial crisis that has been threatening the region over recent years.

Euro heights

All of this had a positive effect on the euro and resulted in adverse moves on the USD. The pair in focus this week is therefore the EUR/USD, which has broken its 12 month high and also experienced its longest winning streak against the US dollar since 2003.

The week began with the pair sitting at 1.3460 and experiencing a sideways day on Monday after ECB representatives stated that there would be no cutting of the interest rates unless the region dipped back into recession.

By Tuesday the pair had made its low of the week at around 1.3415, before starting the rally that continued until the final trading session of the week came to a close. Tuesday also saw a new weekly high, as it hit 1.3495, coming just a few pips shy of the 1.3500 level.

Spanish confidence

Confidence in the Spanish recovery was gaining momentum and the EU managed to agree a deal with Russia to aid Cyprus out of its current debt problems.

On Wednesday the rally took hold as the Italian bond yields came out very positive for the euro and the GDP figures from the US showed a dramatic fall backwards for the world’s number one economy. This was also compounded by the ratings agency Fitch stating that any confusion over the debt ceiling issues in the US would almost certainly result in a downgrade for the country. The price once again made new highs for the week, a pattern that would continue every day for the entire week of trading on the pair.

These strong moves continued through Thursday and Friday with the pair eventually making a run up towards 1.3700, which had earlier been touted as a possible target by Goldman Sachs. On Thursday the FOMC declared that their current bond buying program would continue as long as the US labour market was struggling, which proceeded to weaken USD currency even further, causing EUR/USD to make yet another new high.

Despite talk of a Greek default on part of its loans the mood stayed pretty buoyant for the euro and the gains on the EUR/USD remained intact, to see the pair close the week at new highs and increasing signs that it might yet reach the 1.4000 level, within the next few weeks.

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