Forex Market Outlook 10/05/11
Was yesterday's intense rally just a pause in the selling or does this mark a reversal of trend? This is the million dollar question and one that the markets are weighing very carefully. The catalyst for yesterday's move higher was none other than Fed Chairman Bernanke who stated in his speech to the Joint Economic Committee that further monetary stimulus could be forthcoming.
This gave the markets an immediate shot in the arm and they rallied on those words as the thought of more free Fed money is too good to ignore. Many thought, including myself, that given the politics of further easing he might avoid the topic, but with the recent selling taking place something had to be done. So I applaud him for his courage, though political pressure seems to be waning against complete opposition to further monetary stimulus.
This was enough to push markets higher including the Euro, which had maintained strength until this morning after Moody's downgraded Italy by three notches and warned that further downgrades of other countries could occur. Couple this with weaker PMI services figures from the Euro zone and declining retail sales figures (-1% vs. an expected -.7%) and the economic picture doesn't look much better than it did two days ago.
Yet for some reason the markets believe that EU leaders are making serious strides toward a debt crisis resolution this time, all but admitting that they haven't taken this crisis seriously enough to this point. One positive note was a vote of confidence in Portugal as investors passed on an opportunity to receive early payouts from a bond issue, electing to wait it out.
In the UK, GDP figures came in slightly worse than expected, showing a gain of .1% for the quarter vs. an expectation of .2%, bring the YoY figure down to .6% from the expected .7%. While this does indeed show a declining economic picture, it is unclear if this is enough to cause the BOE to increase asset purchases at tomorrow's rate decision.
The EU rate decision also tomorrow, though, is another story. The ECB has been reluctant to step up in the wake of the debt crisis and it will be interesting to see what if anything they announce tomorrow. They could use this platform not to change rate policy per se, but rather announce plans for how they plan to combat the debt issue. The difference between the two rate decisions is that the BOE does not issue a statement with their decision, and the ECB does.
Rounding out the news from around the globe, Australian retail sales figures came in better than expected, showing a gain of .6% vs. an expectation of .2%. This has helped push the Aussie higher in conjunction with the Dollar weakness we saw yesterday and the follow-through this morning.
The ADP jobs report came out here in the US this morning and showed an increase of private sector jobs of 91K, vs. an expectation of 75K. While this number bears no significant correlation to Friday's Non-Farm Payrolls report, it should be noted that although Friday's NFP is expected to show a gain of around 60K, the number of private sector jobs expected to be added is closer to 100K.
While the markets started the morning in risk-taking mode, it appears as though we are giving back some earlier gains as both stocks and risk assets are selling off a bit. While still in positive territory, it will be interesting to see if this rally can be sustained or if it was just a one-day wonder.
So today may be what we call an "inside day", where we make neither new highs or lows as we wait for the rate decisions of tomorrow to guide sentiment. And of course any news out of the Euro zone will be dissected, though the usual "no news is good news" mantra may not hold water in this situation. Clarity form the Euro zone is needed, and not obscurity.
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