A break below 1.3700-1.3730 on EUR/USD forces us to give up our “bullish” view on the European currency and take a neutral position on the given instrument. As a result, we now have to forget about the QE2 factor in the US and instead concentrate...
A break below 1.3700-1.3730 on EUR/USD forces us to give up our “bullish” view on the European currency and take a neutral position on the given instrument. As a result, we now have to forget about the QE2 factor in the US and instead concentrate exclusively on the problems which are currently present in Ireland. Currently everything indicates that there is a number of investors on financial markets who are making bets that the Irish situation will end up with debt restructuring (controlled default) or with IMF and EU helping Ireland with additional stimulus package. A technical picture as well as the problems in the periphery economies of Europe indicate that the risks in EUR/USD are shifted downwards.
December futures for the price of the 10-year US Treasury Notes (CBOT)
A rise in Treasuries at the end of the current week can be tied not only to the decline in the risk appetite amid the speculations on Irish tensions. Comments of certain US policymakers, in particular, the President of the Federal Reserve Bank in Atlanta Dennis Lockhart are also adding fuel to the fire. These comments follow that the recovery of the US economy will be slow and exhausting. Basically, all this background can provide strength for the US dollar on Forex.
US yield curve (Federal funds rate futures, CME)
As for the interest rate expectations in the US or anywhere else, these are now of secondary importance. It is quite clearly that if the debt crisis resumes in Europe and if the things go as they did in the second quarter, we can forget about monetary policy tightening in the US, UK and Europe and instead realize that the debt crisis may have downside risks for the world economy.
Eurozone yield curve (3M Euribor, Eurex)
Given the current Irish situation, we can presume that neither in December nor in January will J.C.Trichet call upon monetary policy normalization. Moreover, after this difficult year, when both region’s economies (Ireland, Greece) appeared at the threshold of default, Trichet will take a pause straight till the ECB March meeting, thus refraining from giving any comments regarding the changes in the monetary policy. All this consequently forces us to give up playing on the upside in EUR/USD.
UK yield curve (3M Sterling, Liffe)
As before, the only consolation is seen in the GBP/USD pair where still both fundamental and technical factors are more or less normal. Fundamentally, the British pound gets support on increasing confidence in that QE2 can be avoided, and technically it is important to understand that we are trading above the 1.59-1.60 support.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
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