Weekly Review and the Week Ahead: Euro Sinks as Eurozone Problems Continue

The dollar moved higher against major currencies last week. The move was driven mostly by safe haven buying, as the strength of the global recovery has appeared to wane. As a result, Gold, Oil, and Equities were lower as traders rotated out of those assets. The move higher came, even as the US FED stated it was in no hurry to raise rates, at its FOMC meeting. Also, the selloff in stocks occurred as key company earnings continue to beat expectations. Therefore, it is hard to tell if the dollar rally will continue, or is much of the action based on profit taking following last year's massive rally in riskier assets.

Looking ahead, this week's headlines should be dominated by the upcoming Non Farm Payrolls release. Last month, numbers were worse than expected, but continued to show improvement. Therefore, Forex traders will be watching to see if the improving trend continues. If the Non Farm Payrolls are worse than last month, it could cause speculation of increased US stimulus. This could than trigger a reemergence of inflation worries, and cause dollar weakness.

It is worth pointing out that in the past half year, Gold has been an outperformer during the week of the Non Farm Payrolls release, as inflation worries reenter the market. Also, although gold was lower last week, its 1075/80 support level repeatedly held up very well.

EUR

Another week and another move lower in the euro. And once again more of the same news; worries about the fiscal health of Eurozone countries. Along with Greece and Spain, last week, Portugal became the newest Eurozone memberto be slapped with a warning by a major credit ratings company. The overall tone is that Eurozone countries need to rapidly cut down their spending and decrease their debt. What is interesting about the current debacle is that it may continue for a long time without blowing over. Unlike Japan, the UK and Mexico which also have suffered short term downfalls in their currencies due to sovereign debt ratings worries, the Eurozone is suffering from its multi country status. For the former, Forex traders viewed the news as a wakeup call that would shake the countries government to install fiscal prudence. However, regarding the Eurozone, Forex traders are left asking who is the next.

Looking ahead, the ECB meets for their monthly rate decision on Thursday. The ECB and primarily ECB President Trichet was the first major figure to bring up the rising debt levels and fiscal spending in October 2009. Since then, he has quashed any hope of an imminent rate hike. Therefore Forex traders will be eagerly waiting to hear his updates and opinion Greece's reduced 2010 budget.

GBP

In a week of safe haven buying, the pound held its own. This occurred, even as Preliminary GDP numbers missed expectations. Buying in the pound may be caused by Forex traders that are exiting the euro, but maintaining exposure to Europe with the pound. Whatever the reason, the pound's outperformance against the euro has led the EURGBP to five month lows as it hit lows of 0.8602 on the week. Looking at the GBPUSD, it was primarily range bound as it traded between 1.6080 and 1.6280 the whole week.

This week, the Bank of England holds their monthly MPC meeting and is expected to hold rates at 0.50%. Also, key PMI data will be released. After last week's poor GDP number, it remains to be seen if the pound will be able to continue holding up well if this week's numbers also fail to meet expectations. Or will Forex traders become jittery and dump the pound.

JPY

Trading in the yen was mixed last week, as safe haven buying propelled the yen higher; however, a Standard & Poor's downgrade of Japan's outlook sapped the yen's strength. Looking back, the outlook change was viewed as inevitable by Forex traders since Japanese Debt/GDP levels are among the highest in the world. Also, in the 1990's Japan suffered a similar setback. Therefore, most Forex traders took the news in stride, and don't expect the outlook change to have the same repercussions as the outlook changes currently effecting Europe. Nonetheless, Forex analysts are viewing the S&P's actions as a vote of no confidence in Japan's four month old government. Looking ahead, there no meaningful economic announcements from Japan expected this week. Technical wise, the USDJPY continues to be in a four week downtrend, even though the pair was slightly up on the week.