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FX: Consumers More Optimistic but Concerns About Europe Remain

Last updated 11/29/2011 10:26 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

According to the latest U.S. consumer confidence numbers, Americans are feeling more optimistic this month which explains why they have grown more willing to spend. Every single one of the major consumer sentiment reports have pointed to an improvement which would normally be extremely well received by the market if not for the risks in Europe. In fact, if this were more normal times, we could even argue that the U.S. is on its way to recovery following the increases in spending and sentiment. Unfortunately the fiscal battle in Washington and the ongoing crisis in Europe leaves the U.S. economy vulnerable to further weakness. Americans grew more optimistic about present and future economic conditions as the consumer confidence index rose to 56 from 40.9, the largest increase since 2003. This has helped to lift equities and currencies but investors will still have reservations about the sustainability of any rally until there are signs of progress in Brussels.

Safe haven flows in general continued to ease out of the greenback as investors hold out the hope that European officials will make progress on the EU debt crisis at the Eurogroup meeting today and the ECOFIN meeting tomorrow. Unfortunately the initial headlines points to more setbacks with the EFSF now said to be leveraged to less than EUR 1 trillion, which would not be enough to cover Italy. This is not the time to compromise on the size of a package unless they want to waste their money and be forced to revisit this discussion again in the future. Talks of an ECB/IMF deal have also been revived which implies that the Europeans are really having trouble coming up with any new schemes to stabilize the region. We will continue to be watching the headlines closely but if you have read our recent reports, you will know that we are extremely skeptical of the will and ability of the Europeans to put their personal agendas aside and do whatever it takes to resolve the debt crisis. The rally in the euro today was sparked by what would normally be extremely negative news for the currency. Italy sold 3 year bonds at an average yield of 7.89 percent and 10 year bonds at an average yield of 7.56 percent. Investors were relieved that yields did not cross the 8 percent mark but 7.89 percent is already too burdensome for Italy. Also, as we have warned, rating agencies are becoming aggressive making further downgrades the greatest risk for the euro. There are reports that S&P could revise their outlook for France's credit rating from stable to negative over the next 2 weeks which would be the first step towards cutting their AAA rating.

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Comments (1)

mbrad77

November 29, 2011 at 12:03 PM ET

I was wondering if you can add into the Calendar any of the future italian, spanish and french bond auctions. It seems that lately they were also big market movers

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.