To borrow an idea from Barron's, it's too often that a 348 drop in the Dow Jones leads to a sign of relief. But that's what happened last Thursday when an apparent computer glitch caused the Dow Jones to drop 1000 points in mere minutes (it was the biggest intra-day drop ever for the index). As mentioned, traders were relieved to see a rebound occur and a much smaller loss. Overall, the current chaos in Europe has led to a flight to quality with the dollar and gold being huge beneficiaries, at the expense of global equities, commodities, and riskier currencies.
Specifically, market panic led to Gold surging above 1200, even as inflation concerns appear nil. Apparently, Gold isn't giving up its status of reserve currency of last resort too quickly.
Looking ahead, trading is expected to primarily be affected by Euro zone stability, with US economic news taking a back seat. As such, if any sense of stability returns to the market, we could see profit taking occurring in both the dollar and Gold.
Violent riots in Athens were the backdrop to a dismal week for the euro. Clashes there, along with political battles taking place within the German government, have led to a complete lack of clarity for the Euro zone's future. Will the Euro exist in the same form? Will Greece or other nations be kicked out of the European Monetary Union? Will Germany's government back out of its backing of the EU/IMF bailout?
These questions, along with others, have caused Forex traders to flee the Euro for virtually anything else. At this point, the currency has become entirely speculative as buyers are betting on Europe's existing economic recovery to boost the Euro higher over the long term. This occurring even while sellers expect contagion to continue and further credit woes to spread to the rest of Europe.
Also occurring last week was the ECB's monetary policy meeting. At the press conference following the meeting, ECB President Trichet avoided mentioning Greece and centered his speech on the overall recovery occurring within the EU. During the Q&A session, he also sidestepped questions about Greece. This led Forex traders to view the ECB as unwilling to help stabilize the Euro, but also puts this week's EU GDP numbers in play. For better or worse, the ECB has decided they don't want to take a proactive role in the Greek bailout process. Therefore, the Euro will need to see positive GDP news to show that contagion fears are overblown and that the rest of the Euro zone can handle the financial blow from Greece.
A hung parliament it is! The Conservative Party won a clear victory in last week's UK elections but failed to gain a clear majority of the house. Early signs appear to signal that the Conservatives will get the first crack to form a government. As such, trading in the pound is expected to hang in the balance of the new parliament formation.
If the Conservatives can manage to secure a quick coalition, Forex traders are expecting the pound to strengthen. However, if coalition talks become messy, it could lead to further losses for the pound and the GBPUSD trading below its 2010 lows it hit last week.
Beyond the elections, this week will be filled with potential market moving events in the UK. On Monday, the Bank of England is convening for their monthly MPC meeting. Forex traders will be watching to see if the BoE makes any changes in their Asset Purchasing Facility and be prepared to stabilize UK bonds if contagion spreads to UK yields. Also, on Wednesday, the Bank of England will release its Inflation Report. The report is expected to have direct ramifications on the future monetary policy moves of the BoE.
Interest in the yen was renewed last week, as safe haven buying led to a surge in the yen. Also, the Yen was a major beneficiary of the computer related selloff that occurred as once in a lifetime moves occurred in yen crosses. On that move last Thursday, the USDJPY traded down 600 pips from its high to low while the GBPJPY dropped over 1200 pips from 142 to a low of 130.
The pairs did manage to retrace part of their losses, but the move illustrates that favorable sentiment is returning to the pound. With the yen moving higher, we may see additional strength taking place this week, if Japanese exporters begin to buy the yen in order to hedge their overseas sales.