Deja Vu EURO

The single currency price action has us trading back and forth, with the lows getting higher and the sellers becoming a tad more aggressive at the top. Fundamental releases and Greek bond discussions have thus far failed to worry either the bull or the bear. Market commentators must be finding this market boring, the longer term technicals and fundamentals have not changed that much. This current risk on trend will draw to an end if it looks as though Greece will involuntary default in March.

The past weeks Euro euphoria has happened because most investors expected the PSI discussions to wrap up fairly quickly.The market bulls will eventually become impatient. It is then we can expect them to threaten ‘this’ risk positive attitude we are experiencing at the moment. The weeks counter trend rally in the EUR outright has many eyeing a 1.32 or 33 handle, for most its a stretch. However, at these levels the world and their mothers prefer to be short as the longer term prospects for the currency remain rather gloomy. For now, investors must abide by EUR cross selling on any outright rally and better buying of the single currency until the higher lows have been truly broken again.

Thus far, this mornings German ifo data (108.3) has allowed us to witness the high and the low of the EUR’s daily range. The country’s indicators are positive for 2012, with the readings showing that further economic declines are unlikely. However, investors should know that its probably a tad early to take Germanys economic upswing for granted due to the ongoing Euro-zone debt crisis. The inconclusive result of Greek negotiations over the past few days has left the EUR and risk complex vulnerable despite what Germany can bring to the fundamental table.

The market will now turn its attention to the FOMC meetings today where we could get some excitement. No change in policy is expected, however, all members, including nonvoters get to provide, for the first time, ‘anonymous’ fed fund rate projections and accompanying qualitative explanation of the factors behind the projections. Their reason could create some volatility. The market may be too quick to interpret some of these reasons. The law of averages says we will have some outlier projections for early tightening. The market will naturally “over analysis and over-interpreted these signals” that accommodation could be withdrawn more rapidly than is now priced in. FX traders will have to keep an eye on the US yield curve. If front end yields start to rise, the dollar will be bought. The no-fun scenario? The market buys into the no rate change idea until 2014!

Note: The traditional FOMC statement should be released at around 12:30, followed by the “projections materials” including the new fed funds forecasts at around 2:00 and Chairman Bernanke’s press conference at 2:15.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell