Daily FX & Market Commentary: European Markets Finished Mixed As Investors Await U.S. Vote

Daily FX Commentary: (Morning Report)

EUR/USD 

The single currency remains in a sideways mode after yesterday’s bumpy ride, with price hovering around 1.3300. Hourly structure, however, is still aligned towards the downside, as the price holds below MA’s and indicators are in the negative zone. While range floor t 1.3280 that proved to be solid support, stays intact, range-trading will remain in play, while break lower would signal a fresh direction and expose 1.3250 and 1.3200. On the upside, regain of yesterday’s spike high at 1.3370, would improve the near-term structure, but only clear break above 1.3400 to signal resumption of an uptrend from 1.2660, 2012 low. 

Res: 1.3331, 1.3370, 1.3400, 1.3485 
Sup: 1.3280, 1.3255, 1.3200, 1.3151 

GBP/USD 

Near-term structure maintains negative tone, as the pair, unable to regain initial barrier at 1.5900, returns to near-term base at 1.5800. Bears remain favored, with near-term studies in the negative territory, being supportive for possible slide below 1.5800 handle that will confirm break below 4-month range and open way for fresh leg lower, with 1.5750 and 1.5700 seen as next targets. Any bounce would be of corrective nature and facing strong resistance at 1.5900, 200 day MA, ahead of 1.6000, also 50% of 1.6380/1.5800, break of which is required to provide relief. 

Res: 1.5840, 1.5900, 1.5947, 1.6000 
Sup: 1.5805, 1.5753, 1.5700, 1.5675 

USD/JPY 

Yen continues to strengthen against the dollar, on a reversal from 90.23 peak, with initial targets at 88.00 zone being tested so far, just ahead of key near-term support at 87.78, 16 Jan low. As 87.78/90.23 rally has been nearly fully retraced, break lower remains favored for now, with notion being supported by negative near-term studies. However, corrective action may precede fresh bears, as hourly indicators reached oversold zone. Bounces are going to face good resistance at 88.90/89.00 area, where previous highs and Fib 38.2% lie, reinforced by descending 55 day EMA. Only break above 89.50 would delay immediate bears. 

Res: 88.36, 88.56, 88.78, 89.00 
Sup: 88.05, 87.78, 87.35, 87.00


====================================================================

Daily Market Commentary: (Evening Report)

London Market Report

Stocks lifted by upbeat US earnings

    Market Movers
    techMARK 2,230.24 +0.32%
    FTSE 100 6,197.64 +0.30%
    FTSE 250 12,934.40 -0.18%

London’s FTSE 100 finished with moderate gains on Wednesday afternoon ahead of a key vote over the potential extension of the debt ceiling Stateside, as some decent results from US bellwethers Google, McDonald’s and IBM lifted sentiment across stock markets worldwide.

The US House of Representatives is to vote this evening on whether to extend the government's debt ceiling until May 19th. A White House spokesman said that President Barack Obama "won't stand in the way" of this short-term fix.

For the time being, traders will likely focus on tech giant Apple’s results after the closing bell this evening. Earnings are widely expected to fall year-on-year due to a drop in the gross margin, however the market’s attention will undoubtedly be on the company’s outlook for 2013 amid concerns over disappointing smartphone sales as of late.

In other news, the International Monetary Fund (IMF) has slashed its growth forecasts for the global economy, saying that the upturn is expected to be ‘more gradual’ than previously thought. The IMF expects world output in 2013 and 2014 to expand by 3.5% and 4.1%, respectively, down 0.1 percentage point from earlier forecasts.

Markets shrug off Cameron speech

UK Prime Minister David Cameron's much-anticipated 'in-or-out-case' speech on Britain's membership in the European Union didn't really move markets this morning.

He committed his party to holding a referendum on whether the UK should remain in the EU in the first half of the next parliament (by the end of 2017 at the latest). "It is time for the British people to have their say; it is time to settle this question over Britain and Europe," Cameron said.

Financial trader Shavaz Dhalla from Spreadex said this morning that Cameron's speech "proved futile". He said: "European markets took the speech in their stride and digested enough information to gauge that the speech was probably designed to build momentum for Cameron’s next campaign rather than mount a serious economic backing for whether remaining in the EU is worthwhile."

BoE in wait-and-see mode

Minutes from the latest Bank of England policy meeting showed that members voted eight-to-one in favour of leaving the asset purchase programme unchanged at £375bn. The Monetary Policy Committee (MPC) voted unanimously to keep the Bank Rate at 0.5%.

Analyst Chris Crowe from Barclays Research said that the MPC is "still content to wait and see" with the committee "likely to resist expanding QE as long as the economy shows signs of stabilisation and improvement."

Meanwhile, the UK jobless rate fell from 7.8% to 7.7% in the three months to November, better than the consensus estimate for no change. The UK claimant count fell by 12,100 in December to 1.56m, the lowest since June 2011.

Europe Market Report 

European Markets Finished Mixed As Investors Await U.S. Vote

The European markets ended Wednesday's session with mixed results. The markets received a boost from positive earnings results from European giants such as Unilever and Novartis, as well as results from Google and IBM in the United States. However, many investors were hesitant to take a position ahead of the vote to pass a short-term debt ceiling increase in the U.S. House of Representatives. President Barack Obama has stated that he would sign the bill if it clears Congress. Investors will also be watching for the earnings report from Apple later today.

European Central Bank President Mario Draghi observed Tuesday that the 'darkest clouds' over the euro area have subsided while countries reinforced their commitment to reforms. In a speech in Frankfurt, he said resolute actions by euro area governments and European institutions have made the year 2012 quite different than predicted.

Bank of England Governor Mervyn King said it would be sensible to review the arrangements for setting monetary policy. The inflation target was introduced in the U.K. almost 21 years ago, and it has now 'come of age', he noted.

In a speech in Belfast, King said late Tuesday that the economy needs more fundamental reforms to underpin a "gentle recovery." There are certainly aspects of the inflation targeting regime to consider, King added.

British Prime Minister David Cameron on Wednesday said that he is in favor of a referendum on the UK's membership of the European Union, but insisted that he does not want the country to drift towards an EU exit.

In a much-awaited speech in London, he promised to hold an in/out referendum on EU membership by the end of 2017, if re-elected. Cameron said the next Conservative manifesto in 2015 will ask for a mandate from the British people for a Conservative Government to negotiate a new settlement with the European partners in the next Parliament.

With a majority of 8, the Bank of England's policymakers voted to maintain quantitative easing unchanged at the start of the year, as they saw limited stimulus to the economy from further easing. Policymakers led by Governor Mervyn King unanimously decided to retain the record low 0.50 percent interest rate. The meeting was held on January 9 and 10.

The Euro Stoxx 50 index of eurozone bluechip stocks declined by 0.25 percent, while the Stoxx Europe 50 index, which includes some major U.K. companies, added 0.46 percent.

The DAX of Germany rose by 0.19 percent, but the CAC 40 of France fell by 0.40 percent. The SMI of Switzerland increased by 1.35 percent and the FTSE 100 of the U.K. climbed by 0.34 percent.

French business confidence deteriorated unexpectedly in January as manufacturers assessed sharp contraction in past production and forecast a deterioration on own production outlook. The business sentiment index came in at 86 in January, survey data from the statistical office Insee showed Wednesday. It was forecast to rise to 90 from 89 in December.

Spain's recession likely deepened during the three months ended December, with gross domestic product falling for the fifth consecutive quarter, the quarterly bulletin from the Bank of Spain said Wednesday.

Gross domestic product (GDP) is estimated to have dropped at a faster rate of 0.6 percent sequentially in the fourth quarter than 0.3 percent in the third quarter, signaling that the economy has slipped deeper into recession. GDP contracted for the fifth successive quarter.

Government debt in the Eurozone stayed broadly unchanged in the third quarter, data released by statistical office Eurostat showed Wednesday.

Total public debt in the single-currency bloc came in at 90 percent of gross domestic product at the end of the third quarter, little changed from 89.9 percent recorded in the second quarter. The latest figure was, however, higher than 86.8 percent recorded in the third quarter of 2011.

U.K. employment total increased to a record high during three months ended November after people out of work decreased, data from the Office for National Statistics revealed Wednesday.

There were 2.49 million unemployed people in the country during the three-month period, down by 37,000 from June-August. At the same time, the number of people in work increased by 90,000 to 29.7 million for three months to November, the highest since records began in 1971.

The employment rate edged up to 71.4 percent from 71.3 percent during June to August. But it was lower than the pre-recession peak of 73 percent logged for March to May 2008.

US Market Report

Stocks Give Back Ground But Remain Mostly Positive

After showing a strong move to the upside in early trading on Wednesday, stocks have given back some ground over the course of the trading day but remain mostly positive. The markets are benefiting from a positive reaction to the latest batch of earnings news.

The major averages have pulled back off their highs for the session but are currently all in positive territory. The Dow is up 59.85 points or 0.4 percent at 13,772.06, the Nasdaq is up 10.08 points or 0.3 percent at 3,153.26 and the S&P 500 is up 0.36 points or less than a tenth of a percent at 1,492.92.

The modest strength on Wall Street extends a recent upward move by stocks, with the Dow and the S&P 500 reaching new five-year highs earlier in the session.

Traders have largely reacted positively to the latest earnings news, with upbeat quarterly results from some big-name companies inspiring confidence that the markets can sustain some further upside.

Tech giants IBM Corp. (IBM) and Google (GOOG) are both posting notable gains after reporting fourth quarter earnings that exceeded analyst estimates.

McDonald's (MCD) is posting a more modest gain after the fast food giant reported fourth quarter earnings that rose year-over-year and came in above analyst estimates. The company also reported stronger than expected revenue growth.

Fellow Dow component United Technologies (UTX) reported fourth quarter earnings that fell compared to the year-ago quarter but still came in slightly above expectations. The diversified conglomerate also reaffirmed its guidance for 2013.

Shares of iPad and iPhone maker Apple (AAPL) are up by 0.8 percent ahead of the release of its fiscal first quarter results after the close of trading.

Nonetheless, buying interest has waned from earlier in the session, as traders remain somewhat reluctant to continue buying stocks following the recent strength.

Traders are also keeping an eye on developments in Washington, where the House is preparing to vote on a three-month extension of the U.S. debt limit.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in another mixed performance during trading on Wednesday. Japan's Nikkei 225 Index tumbled by 2.1 percent, while China's Shanghai Composite Index rose by 0.3 percent.

In the bond market, treasuries are seeing modest strength, adding to the slim gains posted in the previous session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 1.1 basis points at 1.824 percent.

==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Daily FX & Market Commentary - tocks Turning In Mixed Performance

Daily FX Commentary: (Morning Report)

EUR/USD 

The euro remains at the back foot after repeated attempts at 1.3400 failed and subsequent easing broke below important 1.3300 support, previous resistance and 4h 20 day EMA. This opens prospect for further correction, as hourly structure is negative and 4h indicators continue to slide. The reversal so far retraced 38.2% of 1.3037/1.3401 upleg, bringing immediate risk at 1.3247 higher platform, reinforced by 4h 55 day EMA, loss of which would prompt extension towards psychological 1.3200 support. Hourly 20/55 EMA’s bearish crossover at 1.3325, pressures the price and offers solid resistance, along with 1.3335, previous range floor. 

Res: 1.3300, 1.3325, 1.3335, 1.3356 
Sup: 1.3262, 1.3247, 1.3220, 1.3200 

GBP/USD 

Cable lost ground again, following repeated attempt at 1.6100 barrier failure, to return back to 1.6030 support and risk test of more significant 1.6000/1.5990 near-term base, reinforced by daily Ichimoku cloud base.. Studies on 4h chart turned negative and see potential for further weakness, as the price holds below 20/55 day EMA’s, with break below 1.5990 to expose 1.5960, Fib 76.4% of 1.5826/1.6380 and 1.5900, 200 day MA. Only lift above 1.6100 would provide near-term relief. 

Res: 1.6044, 1.6079, 1.6100, 1.6121 
Sup: 1.6006, 1.5991, 1.5960, 1.5900 

USD/JPY 

The pair continues to move lower for the third day, on corrective pullback from 89.66. Loss of strong support at 88.40 is seen as a trigger, as the price dents next one at 88.00, retracing 61.8% of 86.81/89.66 upleg at 87.90. Dominating negative tone on hourly chart and 4h studies breaking into negative territory, keep the downside favored, with daily indicators starting to point lower, of overbought zone that additionally supports near-term bears. Holding below 88.00 handle, would likely open way towards 87.00 and more significant 86.81, 09 Jan low. Any bounce higher is seen capped at 89.00 zone for now. 

Res: 88.28, 88.74, 88.90, 89.08 
Sup: 87.90, 87.48, 87.00, 86.81 

USD/CHF 

The pair extends recovery rally, clearing key near-term barrier at 0.9300, 04 Jan high that confirm near-term base at 0.9100 and opens way for stronger gains. With gains reaching 0.9330 so far, immediate focus lies at 0.9345, Fib 61.8% of 0.9511/0.9077 descend and 0.9381, 07 Dec 2012 high, to possibly look for test of psychological 0.9400 barrier. Overbought near-term studies, however, see pause in recent gains, with corrective easing facing support at 0.9272 and dips expected to hold at/above 0.9250, Fib 38.2% / 55 day EMA, to keep the bullish bias. 

Res: 0.9330, 0.9345, 0.9381, 0.9400 
Sup: 0.9293, 0.9372, 0.9246, 0.9220 

====================================================================

Daily Market Commentary: (Evening Report)

London Market Report

Markets finish lower, but TUI Travel surges late on

The FTSE 100 ended moderately lower on Wednesday as markets trimmed losses by the close, though the mood was still cautious after both the World Bank and Germany government downgraded growth forecasts.

Concerns about ongoing conflicts in North Africa were also likely to be on investors’ minds today. As the French military intervention in Mali intensifies, there was news of an Islamist militant attack at a BPgas field in neighbouring Algeria which has resulted in a number of deaths and a hostage situation.

Markets are becoming increasingly concerned about the wider implications that these conflicts could have, as a number of neighbouring countries are large suppliers of key petrochemicals and minerals.

The World Bank has cut its global growth forecast for 2013 due to the difficult recovery that economies worldwide are currently undergoing despite the improvement in financial markets. It now expects growth of 2.4% this year, down from its prior forecast of 3%.

Meanwhile, Germany expects its economy to grow by a mere 0.4% this year, well below the 1% growth forecast in October and the 0.7% expansion in 2012.

“Given the news flow today it’s hard to fathom why markets aren’t lower than they are, given the continued stream of bad news from the retail sector,” said market analyst Michael Hewson from CMC Markets.

Nevertheless, markets picked up from their intraday lows in afternoon trade after US banking heavyweights JPMorgan Chase and Goldman Sachs beat consensus estimates with fourth-quarter profits. The latter reported earnings per share of $5.60 for the last three months of 2012, smashing the $3.64 consensus estimate. This was Goldman’s most profitable quarter since the first three months of 2010.

"We’re used to seeing Goldman Sachs beating earnings forecasts, but today’s results caught everyone off-guard," said market analyst Craig Erlam from Alpari.

Europe Market Report 

European Markets Finished Mostly Higher On Positive U.S. Earnings

The majority of the European markets ended Wednesday's trading session in positive territory. Several better than expected earnings reports from U.S. banks provided a boost to investor sentiment. Economic data from the U.S. was mixed and investors are awaiting a slew of Chinese economic reports. Automakers were weak after the decline in new auto sales and banks also turned in a negative performance.

The euro's exchange rate is "alarmingly high" and is likely to affect the Eurozone economy which is showing signs of stability, Eurogroup President Jean-Claude Juncker said Tuesday.

While speaking at the annual gathering of business leaders in Luxemberg, Junker warned that an overvalued euro is likely to threaten the economy that is reemerging from financial crisis.

Junker's comments came just few days after European Central Bank President Mario Draghi'sstatement that the euro area may see a gradual recovery later in the year as there are some modest signs of stabilization.

The Euro Stoxx 50 index of eurozone bluechip stocks increased by 0.05 percent, while the Stoxx Europe 50 index, which includes some major U.K. companies, lost 0.01 percent.

The DAX of Germany climbed by 0.20 percent and the CAC 40 of France advanced by 0.30 percent. The SMI of Switzerland gained 0.45 percent, but the FTSE 100 of the U.K. fell by 0.22 percent.

In Frankfurt, Metro dipped by 0.17 percent. The department store operator reported a marginal rise in fourth-quarter sales despite challenging market conditions, especially in Southern Europe. The company also reaffirmed its full-year profit forecast.

Deutsche Wohnen increased by 0.15 percent, after it resolved on a capital increase against cash contributions and under exclusion of shareholders' subscription rights.

Automakers were weak after data released by the European Automobile Manufacturers' Association showed Europe's new car sales declined sharply in December, continuing a downward trend started fifteen months ago. Sales plunged 16.3 percent from a year ago, while demand for new cars reached the lowest level recorded since 1995. Daimler declined by 0.16 percent and Porsche decreased by 0.68 percent. BMW finished up by 0.80 percent and Volkswagen gained 0.80 percent.

Eurozone inflation remained unchanged at 2.2 percent in December as initially estimated, final data released by Eurostat showed Wednesday. The latest figure is the lowest since November 2010. Inflation has been hovering above the central bank's threshold limit of 2 percent for many months.

The number of people worked in local manufacturing units in Germany rose by about 79,000 or 1.5 percent in November from a year ago, Destatis reported Wednesday. Around 5.2 million people were employed in manufacturing.

Germany's general government debt increased from last year in the third quarter, data released by the Federal Statistical Office showed Wednesday. Total federal debt, including those of governments, states, and municipalities/associations, increased 1.6 percent from last year to EUR 2064.1 billion at the end to the third quarter.

Consumer prices in the U.S. came in unchanged in the month of December, according to a report released by the Labor Department on Wednesday, with a sharp drop in gasoline prices offsetting higher prices for food and shelter.

The Labor Department said its consumer price index was unchanged in December after falling by 0.3 percent in November. The unchanged reading matched economist estimates.

Industrial production in the U.S. increased by slightly more than expected in the month of December, the Federal Reserve revealed in a report on Wednesday, with increased manufacturing and mining output more than offsetting a sharp drop in utilities output.

The report showed that industrial production increased by 0.3 percent in December following a revised 1.0 percent jump in November. Economists had expected production to edge up by 0.2 percent compared to the 1.1 percent growth originally reported for the previous month.

Following eight consecutive monthly gains, homebuilder confidence in the U.S. held steady in January, according to a report released by the National Association of Home Builders on Wednesday. The report showed that the NAHB/Wells Fargo Housing Market Index came in at 47 in January, unchanged from December. Economist had expected the index to inch up to 48.

US Market Report

Stocks Turning In Mixed Performance In Mid-Day Trading

After moving mostly lower in early trading on Wednesday, stocks have turned mixed over the course of the trading day as traders digest a slew of economic data as well as the release of earnings news from some big-name companies.

The major averages are currently turning in a mixed performance, with the Nasdaq posting a modest gain. While the Nasdaq is up 6.50 points or 0.2 percent at 3,117.28, the Dow is down 26.24 points or 0.2 percent at 13,508.65 and the S&P 500 is down 0.47 points or less than a tenth of a percent at 1,471.87.

The early weakness on Wall Street was partly due to renewed concerns about the outlook for the global economy after the World Bank cut its forecast for global economic growth in 2013.

The World Bank said it now expects the global economy to expand by 2.4 percent in 2013 compared to its June forecast for 3 percent growth. Estimates suggest the global economy grew 2.3 in 2012.

However, selling pressure was somewhat subdued following the release of a report from the Federal Reserve showing a slightly bigger than expected increase in U.S. industrial production in the month of December.

The report showed that industrial production increased by 0.3 percent in December following a revised 1.0 percent jump in November. Economists had expected production to edge up by 0.2 percent.

The increase in production came as increased manufacturing and mining output more than offset a sharp drop in utilities output.

A separate report from the National Association of Home Builders showed that homebuilder confidence held steady at a six-year high in January, while the Labor Department said consumer prices were unchanged in December.

Meanwhile, traders are also digesting quarterly results from JP Morgan (JPM) and Goldman Sachs (GS), with both financial giants reporting better than expected earnings.

Shares of Goldman Sachs have risen by 2.8 percent on the news, reaching their best intraday level in well over a year. JP Morgan initially moved lower but has climbed back near the unchanged line since then.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan's Nikkei 225 Index tumbled by 2.6 percent, while China's Shanghai Composite Index fell by 0.7 percent.

In the bond market, treasuries have pulled back near the unchanged line after moving modestly higher in early trading. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is down by less than a basis point at 1.825 percent.

==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Weekly Market analysis - currency policies remain in focus following FED decision on additional QE

Weekly Market analysis

Monetary and currency policies will remain a very important focus following the Federal Reserve decision to sanction additional quantitative easing during 2013 and further action by the Bank of Japan.  There will be further unease over the implications of currency gains and resistance is liable to increase which will risk fuelling a more aggressive phase of currency wars as central banks look to resist currency appreciation. Key events for the forthcoming week Date Time (GMT) Data release/event Thursday December 27th 15.00 US jobless claims Thursday December 27th 15.00 US consumer confidence Dollar: Fiscal policy will remain important in the short-term as fiscal talks continue and there is likely to be a deterioration in risk appetite which would support the dollar if there is no progress. The Federal Reserve stance will remain an important focus throughout the next few months and the dovish policies will have a negative impact on the US currency as the Fed continues its policies of bond purchases. There will still be expectations that the US economy will out-perform the Euro-zone which should provide some degree of dollar support. There has also been a retreat in precious metals prices which suggests that underlying dollar selling is likely to be contained. The dollar remained on the defensive for much of the week, but did find some respite as risk appetite faded again as the Euro retreated from the 1.33 area. Regional Fed Presidents Lacker and Fisher continued to voice opposition to the recent additional quantitative easing. There were, however, strong expectations that the dovish view would prevail, especially with the doves maintaining a strong position on the 2013 FOMC which will keep policy loose. The US current account deficit narrowed to US$107.5bn from a revised US$118.1bn the previous quarter. As a percentage of GDP the deficit was below 3.0% compared with a peak above 6% of GDP in 2005. There is the potential for a medium-term decline in the deficit as the energy deficit narrows and the US currency will be slightly less vulnerable to underlying selling. The US jobless claims data was slightly weaker than expected with an increase to 361,000 in the latest week from a revised 344,000 figure the previous week. The other releases were stronger than expected with the third-quarter GDP estimate revised up to 3.1% from 2.7%. In addition, there was a stronger than expected reading for existing home sales at 5.04mn from 4.76mn the previous month while the Philadelphia Fed index increased to 8.1 from -10.7 the previous month. US budget negotiations remained an important focus as the House of Representatives debated the so called ‘plan B’. Speaker Boehner insisted that the House had the votes to pass the bill while President Obama stated that it would be vetoed.  As the vote deadline approached, Boehner admitted that he did not have enough support and the vote was cancelled as some Republicans refused to back any tax increases. Further votes are not scheduled until at least December 27th which triggered a sharp deterioration in risk appetite on fears that the year-end deadline would be missed. Markets still expect that a compromise deal will be reached eventually which helped cushion the impact, but sentiment could deteriorate sharply if deadlock persists   Euro There will be further relief that the acute Euro-zone crisis phase has eased with the Greece debt buyback completed while there has been a further decline in peripheral bond yields.  There is a very heavy schedule of peripheral debt issuance during the first quarter of 2013 which will make it difficult for Spain to resist a bailout. The underlying growth outlook remains extremely weak which will maintain pressure for a more aggressive ECB policies. Political tensions will also intensify with Italian elections likely in February and the Euro will find it very difficult to make any sustained headway given the net economic risks.  The Euro advanced to 7-month highs against the dollar on an easing of Euro-zone fears and improved risk appetite and peaked at 1.33 before edging lower. ECB President Draghi was also cautiously optimistic surrounding the 2013 outlook as Euro-zone officials continued their attempts to play-up the economic prospects. Draghi expressed confidence that competitiveness in Spain was starting to improve and was optimistic over the benefits of a single bank supervisor. There was a further increase in bad debts within Spanish banking sector as the ratio rose to a fresh historic high of 11.2% in November from 10.7% previously which will maintain fears over the Spanish outlook.  For now, however, wider fears surrounding the Euro-zone have eased which has encouraged a further drop in speculative short positions against the currency and the Greek credit rating was revised to B- from selective default with a stable outlook. The German IFO index was slightly stronger than expected with a second successive monthly increase to 102.4 from 101.4. Although there was a lower than expected reading for current conditions, the data maintained a more favourable tone. There was a further decline in peripheral bond yields which helped underpin sentiment as Italian benchmark yields declined to a two-year low.  ECB member Asmussen stated that he would be very reluctant to cut the deposit rate to below zero which cast some doubt over the prospects for an ECB rate cut. Yen: The LDP won a huge victory in the recent lower-house elections and the strength of their majority should mean that they can over-ride any veto attempt from the Upper House. The government will push ahead with aggressive policies to combat deflation. There will also be intense pressure on the Bank of Japan to take an even more aggressive stance on monetary policy and the bank will consider an increased inflation target early in 2013.  These pressures will exert downward pressure on the yen, but the currency could still gain at times when there is a deterioration in global risk appetite. The Japanese election result recorded a major LDP victory as they won 294 of the 400 seats in the lower house with their partner winning a further 30. The results give the coalition a two-thirds majority and this is extremely important as the government can over-rule opposition from the Upper House The latest trade data recorded a headline deficit of JPY953bn from a revised JPY549bn previously as exports recorded a 4.1% annual decline. The data reinforced fears surrounding the export outlook and reinforced negative yen sentiment. The Bank of Japan announced a further JPY10trn in quantitative easing which was in line with market expectations. There is still a high degree of pressure on the central bank to take additional steps to boost the economy and sanction additional policy measures. Incoming Prime Minister Abe stated that the central bank was carrying out policy steps sought by the government one at a time in a clear reference to the government expecting further action. The administration is planning an emergency economic package in January and the yen remained under heavy selling pressure. The yen found support towards the 84.50 area against the dollar and recovered ground as risk appetite deteriorated sharply following the collapse in US fiscal cliff talks. The US currency moved back to the 84 area as the Euro retreated to below 111. Sterling There will be further unease surrounding the UK economic outlook with expectations of a weak fourth-quarter.  There will be major uncertainties surrounding Bank of England policies and there will certainly be pressure for the central bank to maintain an aggressive stimulus policy to underpin demand.  There will be speculation over a shift towards nominal GDP targeting when Carney takes over as Governor later next year.  The UK currency will continue to gain some protection from the aggressive policies pursued by other global central banks, but Sterling is unlikely to make significant headway. Sterling was resilient during the week and challenged 3-month highs around 1.63 against the dollar before consolidating slightly lower. There were further concerns surrounding the AAA credit-rating following the Standard & Poor’s decision to downgrade the outlook to negative and there was further speculation that the rating would be lost during 2013.  With the Federal Reserve increasing its bond purchases and the Bank of Japan expand policy further this week, there will be some initial Sterling support on relative grounds with expectations that the Bank of England will hold policy steady in the short-term.. The latest inflation data recorded an unchanged annual rate of 2.7% for November compared with expectations of a marginal decline. Although the RPI rate dipped to 3.0% from 3.2%, there were some expectations that the stickiness in inflation would curb any further quantitative easing by the Bank of England. The Bank of England minutes were broadly in line with expectations as the MPC voted 9-0 for unchanged interest rates while there was a 8-1 vote in favour of leaving quantitative easing on hold as Miles again voted for a further £25bn expansion in bond purchases. The bank was generally pessimistic over the growth outlook and warned over the stickiness of inflation. There were also further calls for a weaker exchange rate with Sterling’s gains described as unhelpful and a headwind for recovery and this is likely to be an important issue during 2013. The headline retail sales report was weaker than expected with sales unchanged for November following a revised 0.7% decline for October. There was also a sharp decline in the latest GfK consumer confidence reading from -22 to -29. Swiss franc: The National Bank will remain strongly committed to maintaining the 1.20 minimum Euro level in the short-term, especially with a strong determination to resist franc appreciation to protect competitiveness. Aggressive policy relaxation elsewhere will maintain the risk that upward pressure on the franc will intensify again as investors look for a safe-haven, especially if the Japanese yen is subjected to further selling pressure. The dollar remained firmly on the defensive against the franc and dipped to fresh 7-month lows just below 0.91 before staging a weak corrective recovery. The Euro consolidated around the 1.2080 area with narrow ranges prevailing. With liquidity declining into the Christmas period there is likely to be an increased reluctance to take on the National Bank and the 1.20 minimum level and a potential for a further round of short Euro covering. There were wider concerns surrounding the risk of renewed tensions during 2013 and the franc also gained support from a lack of attractive safe-havens, especially with the yen under serious selling pressure. Australian dollar The Australian dollar continued to probe resistance above 1.05 against the dollar during the week, but it was unable to sustain the gains and retreated back to below the 1.05 level. The currency was unsettled to some extent by a decline in gold prices and dipped again when there was a deterioration in risk appetite. The monetary policy minutes suggested that the bank could be cautious over further interest rate cuts, but Reserve Bank Governor Stevens also continued to suggest that the currency was over-valued and that it should be weaker. There is likely to be resistance to currency gains with the Reserve Bank under pressure to push the currency weaker, especially if growth fears intensify. Canadian dollar: The Canadian dollar was unable to make further headway during the week and edged back to the 0.99 area as narrow ranges generally prevailed. The latest retail sales data was stronger than expected which provided some relief and oil prices were generally firm, but a decline in gold prices had some negative impact. Even with near-term resilience and optimism surrounding the fundamentals, the Canadian dollar will find it difficult to advance from current levels.

Weekly FX Market Analysis: Concerns surrounding the Euro-zone economic outlook

Weekly Market analysis

There will also be further concerns surrounding the Euro-zone economic outlook, especially with downbeat ECB forecasts and peripheral economies still trapped in recession. The banking sector will also be an important focus with continuing fears surrounding the threat of de-leveraging. The ECB discussion of negative deposit rates will have an important impact in unsettling the Euro. The dollar will still find it difficult to gain strong support given expectations of further Fed quantitative easing. Key events for the forthcoming week Date Time (GMT) Data release/event Tuesday December 11th 10.00 German ZEW index Wednesday December 12th 17.30 US FOMC interest rate decision Thursday December 13th 13.30 US retail sales Dollar: There have certainly been mixed US growth indicators and there are concerns over a potential slowdown, but there will be expectations that the US will out-perform.  Both fiscal and monetary policies will remain an acute focus in the short-term. Negotiations surrounding the fiscal cliff will continue in the short-term with still little progress in talks between Congress and the Administration. If there is no progress within the next three weeks, sentiment could deteriorate sharply. There will be speculation that the Federal Reserve will announce additional bond buying plans next week to offset the ending of Operation Twist. The dollar should still prove broadly resilient, but struggling to gain strongly. The dollar was on the defensive initially, but did regain ground later in the week as European currencies were subjected to renewed selling pressure. The latest US ISM index recorded a 2012 low with a decline to 49.5 from 51.7 the previous month as the employment index also dipped to below the 50 level for the first time in three years. There was a slight deterioration in risk appetite following the release, although the impact was limited by a monthly gain in the US PMI index produced by Markit which triggered uncertainty surrounding the situation. There were fresh proposals on the US budget talks from both the President and House Republicans, although there was no evidence of significant progress at this stage with brinkmanship ahead of the year-end deadline still a notable feature. There was a weaker than expected ADP employment reading of 118,000 for November following a revised 157,000 gain the previous month.  There was a stronger than expected ISM services-sector reading of 54.7 from 54.2 previously.  There was, however, some disappointment surrounding the employment sector with a decline to 50.3 from 54.9 previously and there was caution ahead of Friday’s payroll release with a weaker headline figure expected. Euro There will be further relief surrounding the Greek Euro-zone package, especially if a successful debt buy-back programme can be implemented. There will still be a high degree of unease surrounding underlying trends as the peripheral economies remain trapped in recession.  There will be speculation that the ECB will sanction a further cut in interest rates and introduce negative deposit rates which would reinforce the Euro-zone underperformance in growth terms.  There is also still the risk that sovereign fears will intensify again. In this environment, the Euro will find it difficult to make much headway.  After advancing early in the week, the Euro was subjected to renewed selling pressure. There were better than expected terms for the planned Greek debt buyback which helped underpin sentiment. There was also a slightly more robust tone to Euro-zone sentiment and peripheral bond yields declined. There were some concerns surrounding the Spanish outlook with expectations that the 2012 budget target would be missed, but there was a slightly more confident tone surrounding the banks. There was some relief surrounding the Euro-zone PMI services-sector with a final reading of 46.7 from a flash 45.7, even though there was a further deterioration in the Italian reading. In contrast, there was a weaker than expected reading for Euro-zone retail sales with a monthly decline of 1.2% decline with an annual decline of over 3% which reinforced fears surrounding the spending and wider growth outlook. There was little change in yields at the latest Spanish auction, but total issuance was slightly lower than expected which suggested that demand was fading and there was a significant increase in yields following the auction.  There were reported comments from government officials suggesting that Spain would apply for sovereign bailout if there was a guarantee on yields, something which will be resisted strongly by the ECB which had some impact in unsettling the Euro. Italian political stresses as Berlusconi’s PD party did not support the government in the Senate vote on growth measures. Although the bill was approved, there were fears over renewed political instability and an early election as Berlusconi withdrew support from the government. There was a renewed decline in German bond yields. As expected, the ECB left interest rates at 0.75% at the latest Council meeting. There was a downgrading of growth and inflation forecasts at the meting with the 2013 GDP estimates for example cut to a range of -0.9% to +0.3% which suggested that greater risk of contraction than growth for the year. In the press conference, Draghi stated that there had been a wide discussion of interest rates, but with no decision which suggested that several members had pushed for a cut at this meeting. This reinforced speculation that rates could be cut early next year and a remark that the ECB was operationally prepared for negative deposit rates was particularly important in undermining the Euro. The comments reinforced fears surrounding the economic outlook and potential for lower interest rates which both sapped currency support. Yen:  There will be further concerns surrounding the Japanese economy.  The LDP, continues to hold an opinion-poll lead ahead of the December 16th General Election, maintaining expectations that there will be a much more aggressive monetary policy and potential changes to the Bank of Japan mandate next year. These expectations will undermine the yen, but there will still be the threat of political deadlock which could delay action. The yen will also gain defensive support at times when risk appetite deteriorates. The yen was subjected to solid selling pressure on any significant gains as underlying yen sentiment remained weak with the dollar finding support below 82. There was caution over selling the Japanese currency further, especially in view of the substantial build up in short speculative positions seen over the past few weeks. There was also a reluctance to commit funds ahead of an extremely uncertain election later this month, especially as parliament is liable to be increasingly fragmented. Underlying yen sentiment also remained weak amid expectations that the Bank of Japan would take a more aggressive stance on monetary policy either by its own volition or due to enhanced government pressure. The latest opinion polls suggested that the LDP would be  able to secure a majority in the lower house following the December 16th election which maintained expectations of a weaker yen. Sterling There will be further doubts surrounding the UK economic outlook, especially with the OBR announcing a further significant downgrading of forecasts. The outlook for weak growth will also increase unease surrounding the debt outlook with the government admitting that targets will no longer be met. In this environment, there will unease over the threat of a downgrading to the AAA credit rating and there will also be intense pressure on the Bank of England to maintain a very aggressive monetary policy. This combination is unlikely to provide strong Sterling support. Sterling moved to test resistance levels above 1.61 against the dollar before losing ground later in the week even though it recovered losses against the Euro. There was a decline to 49.3 for the November manufacturing index from 50.9 previously, the fourth month of contraction seen during the second half of 2012. There was a weaker than expected reading for the UK PMI services-sector index of 50.2 from 50.6 previously which was the lowest reading since January 2011 as orders declined for the first time in close to two years. The government Autumn Statement was broadly in line with expectations as the GDP forecast was cut to -0.1% for 2012 with a 2013 forecast of 1.2% compared with the previous 2.0% with a downgrade of medium-term expectations. Given weaker growth, the Chancellor warned that the government’s debt targets would not be met with the debt/GDP ratio not peaking until 2015/16.  Fitch warned that the peak debt expectations were close to the limit for an AAA rating which will reinforce expectations of a 2013 downgrade. Although there was a substantial debate over the potential impact of any rating cut, there was an underlying mood of caution. The latest UK trade account data was weaker than expected with a goods deficit of GBP9.5bn from GBP8.4bn the previous month as exports were generally disappointing which had some negative impact on sentiment. There were no surprises with from the Bank of England with interest rates and quantitative easing on hold. Swiss franc: The National Bank will remain strongly committed to maintaining the 1.20 minimum Euro level in the short-term, especially with competitiveness still a very important issue, illustrated by the decline in consumer prices for November. There will be the potential for further inflows into the Swiss currency if there are further stresses within the Euro-zone.  Overall, the central bank should be able to hold the line in the short-term. The Euro advanced to an 11-week high just above the 1.2140 area against the franc on reports that the negative interest rates imposed by Credit Suisse and UBS on large-scale foreign deposits could be as much as 1%.  There was uncertainty surrounding the move with Credit Suisse suggesting a variable rate was likely. There was still important uncertainty surrounding the underlying Euro-zone outlook and yields on Swiss Treasury bills remained below zero which still suggested firm underlying defensive demand for the currency. There was a 0.3% decline in consumer prices for November compared with expectations of no change which reinforced unease surrounding the deflation threat and will also maintain pressure for franc gains to be resisted with the National Bank. The Euro retreated back to below 1.21 while the dollar found support close to 0.9250. Australian dollar The Australian dollar proved resilient on dips and tested resistance levels around 1.05 against the US currency. The Reserve Bank of Australia decision to cut interest rates by a further 0.25% to 3.00% had been priced in and dip not trigger additional selling. There was greater optimism surrounding the Chinese economy. There was also a stronger than expected labour-market report with employment increasing by over 12,000 which helped underpin confidence. There were still generally cautious remarks from Reserve Bank officials on the state of demand within the economy and the trade deficit widened to a four-year high. The Australian dollar has proved to be broadly resilient, but will find it difficult to make significant headway given the net global and domestic risk profile. Canadian dollar: The Canadian dollar was able to resist any further test of support beyond parity against the US currency and again tested resistance around the 0.99 level. As expected, the Bank of Canada held interest rates at 1.0% following the latest council meeting. The bank also resisted any significant shift to a more dovish tone on future policy which helped support the Canadian currency. Even with near-term resilience, the Canadian dollar is likely to weaken gradually, especially with growing unease surrounding the global growth outlook.