Week in FX Europe – EUR deflates after EU data and US employment

This week has been a rollercoaster ride for the euro. The uncertainty surrounding the fiscal cliff in the US boosted the single currency against the US dollar. Going off the cliff for a day and the watered down agreement continued the trend as the euro climbed as high as 1.3299 on Wednesday.

The last few days however, the euro has nosedived since. With the fiscal cliff behind us, with the debt ceiling debate in the horizon, the markets refocused on Euro-zone data, and were not impressed with some soft PMI numbers out of the Eurozone. Another factor weighing on market sentiment is the release of the minutes of the December FOMC meeting, where the suggestion was raised to end QE4 sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar.

As we move into 2103, the markets are closely watching Europe’s banking sector, which has been hard hit by the debt crisis. This dire situation has led to a sharp drop in the amount of bank loans to private households. Such loans dropped by 0.8% in November compared to a year ago, after a similar decline in October.

The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.

 

Cliff Deal Passed – EUR/USD reaction
Germany Plans to Cut 6 billion to Reach a Balanced Budget
Friday Economic Releases Positive for Eurozone Worrisome for UK
German Retail Sales Rise 2.1 percent in November
Strong austerity measures allow Latvia to pay back IMF bailout funds – Good or bad?
Europe Factory Activity Falls in December
UK Manufacturing Expands in December
France Hollande Will Keep Pushing for Supertax
Portuguese Controversial Budget to be Decided in Court
German Elections in 2013 A look at one of Merkel’s Rivals
UK Manufacturing Rises to 15 month high

WEEK AHEAD

  • EUR Euro-zone Producer Price Index
  • CNY Consumer Price Index
  • CNY New Yuan Loans
  • GBP Bank of England Rate Decision
  • GBP BOE Asset Purchase Target
  • EUR European Central Bank Rate Decision
  • GBP NIESR Gross Domestic Product Estimate

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza