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Forex Market Outlook 1/11/12

By Mike Conlon, ForexNews.com on Jan 11, 2012 02:00:00 GMT

Welcome to forex trading--2012 style! As you can see, the markets in general are trading with big volatility. One day we're up big, the next day we're down big. Sometimes it seems like the market is spinning its wheels, yet there is plenty room to make money.

Today the markets are lower to start the morning in the same fashion that yesterday we were higher. But what really has changed overnight? Not a whole heck of a lot. In fact, I think today's early selling could be a bit pre-mature as perhaps the markets are still in 2011 volatility mode, which then becomes a self-fulfilling prophesy and actually creates additional volatility going forward.

This morning's headlines about further concern over the Euro debt crisis while valid are also a bit of a market cop-out as the underlying risk from that situation is always going to be the major risk factor in the market until that day (if it ever comes) that it is resolved.

Earlier this morning, Germany's Federal Statistics Office came out with their forecast that German growth has likely declined from the 3^rd quarter to the 4^th quarter and that the growth has slowed to 3% from 3.7%. Overall growth in the EU has likely slowed from .2% to .1%, which is going to put them perilously close to the textbook definition of inflation. However when it comes to economic slowdowns, it doesn't really matter what the definition is as confidence has probably already eroded by that point. In other words, people start feeling that things are getting worse far before the condition they are feeling is officially diagnosed as "recession".

In the meantime, bond auctions are coming up for Spain and Italy yet yields today have moved lower. The usual "play" is that yields usually rise prior to these auctions so that investors will see better returns so this may be a step in the right direction for the issuers. This however did not keep the calls from Fitch ratings agency for the ECB to buy more sovereign debt as they have been somewhat loathe to do.

Tomorrow's rate policy decision could surprise as there is no expectation for change but the accompanying statement could foreshadow possible moves by the ECB to increase those bond purchases. With everyone forecasting an EU recession, this could be a time to get out in front of the problem. Let's face it; while the ECB has been staunch against fighting inflation, they may need a lower-valued Euro to compete in a declining global economy.

Later today the US Fed will release its "beige book" economic report, which will show their opinion of the US economy. Unfortunately for the Fed, their forecasts have been way off in the past and unfortunately they cannot stipulate that the government repairs the fiscal side of the economic ledger. I expect them to be overly optimistic so as not to spook the markets but I take this report with a grain of salt. Should they actually decide to be a little more honest in their assessment, then this could be a market-moving event.

Trade balance (deficit) figures in the UK came in higher than expected and the Shop Price Index came in slightly lower than last month. This could be important, as the BOE rate policy decision tomorrow may be ready to become more accommodative. While they are not likely to change policy tomorrow, the release of the minutes from the meeting will be in 2 weeks which could show that intention.

Tomorrow will also bring CPI data from China and Germany, which could be telling if inflation stays low. This could open the door more accommodative policy from around the globe.

At the end of the day, the Euro debt crisis is not going away any time soon so the sooner markets come to accept this, the better. US corporate stock earnings are still coming in largely positive so the global economy can still move forward, it just the balance of who leads and who follows that changes.

And there's no better way to pick those winners and losers than through the forex market!