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As last week ended trading on global markets shifted again into summer holiday mode as there were very few eco data, especially in Europe. UK markets began to close down early as traders left for the long holiday. US markets began the Labor holiday week with many traders enjoying the long two weekend beach vacations; if not for Jackson Hole the end of this week it would be a "non" week for the markets. There were the usual comments from policymakers and analysts on the Greek debt situation in the run-up to the meeting between Greek PM Samaras and German Chancellor Merkel in Berlin. However, all this brought very few new insights. Nevertheless, the momentum of EUR/USD was clearly less strong than was the case earlier last week as pair dropped below a first minor support at 1.2537. At first, there was no follow-through selling, but the price dynamics suggested some fatigue on the recent up move. The pair changed hands in the 1.2520 area at the onset of the US trading session. US investors had apparently adapted positions to the Fed Minutes as there was no heavy additional dollar selling anymore. The Merkel/Samaras communication was as expected (wait until the Troika report), but also provided no help for the euro. The US durable goods orders were mixed (headline strong, details weak) and had no lasting impact on trading.
EUR/USD dropped temporary below the 1.25 mark, but regained that level as equities reversed earlier losses. So, the risk-on/risk-off theme did again its job for EUR/USD trading. At around the close in Europe, markets were disturbed by a report that the ECB was mulling to set a yield band target for its bond buying plan. Once again, this was nothing more than one hypothesis on what the ECB can do, but investors apparently concluded that a big step from Draghi is coming closer. More or less at the same time there were also headlines from a letter of Fed’s Bernanke to the Congressional oversight panel. In this letter he repeated that the Fed has room to deliver additional monetary stimulus. Risk assets and the EUR/USD pair jumped sharply higher on these headlines.
However, the intraday top and Thursday’s correction high stayed out of reach. Later in the session EUR/USD even reversed most of the late session spike (contrary to US equities which preserved their gains). The pair closed the session at 1.2512, compared with 1.2564 on Thursday evening.
During the weekend, the debate on the EMU crisis strategy in Germany continued. Some allies of Chancellor Merkel still expected Greece to leave the EMU in the near future and the Bundesbank continued to voice its unease with the bond buying programme. Of course, all this is nothing new, but as such it is still no help for the single currency. EUR/USD is changing hands in the low 1.25area.
Today, the calendar is rather thin. There are no important eco data from the US. In Europe, investors will look out for the German IFO indicator. Is the slowdown in activity in Europe’s biggest economy is bottoming out?
A negative surprise might be negative for sentiment on risk and for the euro as growth is a necessary condition to solve the debt crisis. As was the case on Friday evening, markets might be haunted by all kinds of rumors, scenarios, ‘reports of people with knowledge of the matter’ speculating on the details of the ECB action plan.
All this will be a source of volatility at least until the September 6 ECB meeting. This week speculation will also continue on the Fed’s policy ahead of Bernanke’s speech at the Jackson Hole conference on Friday. Speculation on more Fed easing should be negative for the dollar. However, is there that much room for the euro to gain further ground against the dollar as long as the event risk on Europe remains high? Friday’s price action at least suggests that the easiest part of the gains for the euro might be over. At the same time important technical resistance is lining up. Volatility will remain high, but we have the impression that the topside in EUR/USD is becoming difficult.
From a dollar point of view, markets were pondering the chances for further Fed easing. Until last week, both factors were in balance, keeping EUR/USD in a sideways trajectory. However, the soft tone of the Fed minutes provided a good reason to justify a break above the 1.2444 range top, improving the short-term picture in this cross rate. In a broader perspective, it will be interesting to see whether/at what pace the decline of the dollar continues. In a longer term perspective we are not convinced that the rise of EUR/USD should continue.
For traders winding down their summer vacations and closing their beach homes, this will be a stressful week. How can you relax with Bernanke's Jackson Hole speech scheduled for August 31, 2012?