Forex Market Outlook 12/5/11

This week like many others in recent history is going to be all about the Euro. I'm sure you are all surprised by this; as the Euro zone has been relatively quiet of late. Ha, just kidding. Obviously the Euro zone debt crisis has been the major topic in financial markets and the impediment to market advancement.

Last Friday's Non-Farm Payrolls report here in the US left something to be desired despite the great headline number showing a .4% decline to 8.6% unemployment from 9%. The problem is that the number of added jobs came in as expected, and the number was largely a reflection of discouraged workers leaving the workforce. While it wasn't a bad number, it wasn't all too great either so the markets sold off accordingly ahead of the weekend's potential for a risk event to occur.

However this morning we are back to risk taking mode with a renewed hope that this week will be the week that EU leaders get it all figured out. Friday's EU Leaders meeting in Brussels is expected to produce words that show progress toward finding a solution. Note that I didn't say, "find a solution" as we are likely to get more of the same. But leaders now have to do more to assuage market fears and to slow bond vigilante attacks on the PIIGS countries as higher bond yields will hurt the process and there is no way EU leaders can solve it faster than yields becoming unsustainable.

The market would love to hear that they have found a way to have more of a fiscal union, or to at least a way to provide for better oversight. Also, Germany backing away from an outright refusal to consider Euro bonds could also help in the process. The ECB rate policy meeting on Thursday could produce a 25bp rate reduction, as Draghi has been quick on the trigger and may try to halt a potential recession before one even gets started.

Thursday will also bring the UK rate policy decision and it will be interesting to see if they do anything at this point after increasing the asset purchases last time. The BOE has been ultra-accommodative despite the inflation, and the economic data still continues to produce decent results in comparison to the rest of the world.

There are also interest rate decisions for the commodity bloc, with Australia, New Zealand and Canada expected to make no change to policy.

Global stocks are higher to start the morning, as is oil which has just reached $102. Surprisingly gold is not following suit, which could mean that oil premium is a result of the geo-political climate in the Middle East.

There is also manufacturing and GDP data due out for various countries (check the economic calendar), but by and large the biggest driver of markets this week will be the news out of Europe and if we get any unexpected rate changes from Central banks.

The markets definitely want to go higher from here and the Euro debt crisis is the only thing really holding us back. Friday's EU meeting will be important as to how we close the week, as will various economic data due out of China including manufacturing, retail sales, and CPI.