The FOMC, Italy and the EuroFin Meeting Add Excitement to the FX Markets This Week

Sparks are expected to fly today in the eurozone and headlines should follow the political uncertainties in Italy, the eco calendar does not fill up until mid week.  Moving backwards the week will end in the US, as retail sales, claims and PPI are published on Thursday, while industrial production, PMI and CPI are published on Friday. The FOMC meeting on Wednesday, including an expected announcement of more Treasury bond buying, new forecasts and a press conference will get a lot of attention too.

On Friday, democrats and republicans accused each other from blocking the talks, without however giving info about these talks. Potentially better news on Sunday, as president Obama met House leader Boehner in the White House apparently to negotiate. A president spokesman said “we are not reading out details of the conversation, but lines of communication remain open”. This might signal that both sides have now entered serious talks after having had more eye for their positioning towards their constituencies previously. In Europe following steep growth downgrade by the ECB and talk about a rate cut, markets will closely watch the key eco data releases. On Tuesday, the ZEW survey and the advance PMI’s on Friday. Still more important will be the political activity. On Wednesday, an Ecofin meeting will try to reach agreement on pending issues regarding the banking union ahead of the EU Summit that takes place on Thursday and Friday.  That makes for one busy week, but be sure the currency movement is going to focus on the FOMC and Greece and Italy with Spain in the background.

On Friday, EUR/USD extended the correction that intensified after the ECB press conference of president Draghi on Thursday. The focus turned to the US payrolls report. The report was better than expected. However, the outcome didn’t change the broader picture on global markets or on the currency market. EUR/USD closed the session, and the week, with a moderate loss. This followed along to early trading on Monday dipping 36pts to trade right at the 1.29 price level. There was a lot of press analysis on what will happen in Italy as PM Monti announced that he will step down. Uncertainty on the political situation may push peripheral bond spreads wider and might be a negative for the euro. The Greek debt buyback apparently didn’t go that bad, but the tender might still be reopened today in order to meet the targeted amount of debt reduction for the country. Looking at the broader market context, sentiment on risk isn’t that bad in Asia. Chinese trade data this morning disappointed, but industrial production data and retail sales published during the weekend.

The euro is expected to remain weak against the dollar; it’s a tossup on which way the Fed will go. The euro is trading against the dollar currently at 1.29 against the GBP at 0.8050 and against the JPY at 106.41. Gold remains rangebound at 1707.05.