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EUR: Another Week of Hope Versus Reality for Europe

Last updated 12/5/2011 9:10 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

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With currencies and equities up across the board this morning and European bond yields down, this busy trading week has started off on strong footing.  However, the magnitude of the rally in the euro and other high yielding currencies shows that investors remain skeptical about European leaders' abilities to provide any tangible solution for the region's debt crisis.  Lets start by saying that everyone should take off their rose colored glasses because this will not be the meeting to end all meetings.  Based on the agenda for the EU Leaders Summit, the focus will be on greater fiscal cooperation and governance which would be helpful in the long run but fail to satisfy the appetite of traders who are waiting with bated breath for any type of monetary commitment.   

 The rumor mill is on full blast this morning with talk of the Fed and 17 central banks from Europe providing a triple digit billion dollar loan to the IMF and the ECB working on a trillion dollar intervention plan for the European bond market.  Central banks will most likely continue to provide more liquidity to the market by cutting interest rates.  We expect both the European Central Bank and the Reserve Bank of Australia to lower rates by 25bp this week.  The ECB already noted that they have no interested in increasing bond purchases but they could extend unlimited short term loans to banks.  With the central bank meeting on the same day as the EU Leaders Summit begins, ECB President Draghi will most likely leave the door open to more stimulus which could weigh on the EUR/USD if EU Leaders come up short again.   

 U.S. non-manufacturing ISM is scheduled for release at 10:00 AM ET this morning but we do not expect it to be very market moving given that payrolls were released on Friday.  The only country without any major event risk this week is the U.S. and for this reason the only thing that will matter to the dollar is risk on or risk off.  Demand for safety will be single most important driving factor for the greenback this week and there is a good chance safe haven flows will ease ahead of the EU Leaders Summit on Dec 8 and 9 and depending upon the outcome, safe haven demand could return the following week. This morning's meeting between Merkel and Sarkozy will be very important in setting the stage for the EU Summit but given Merkel's attempts at downplaying significant progress, the chance of the two most powerful leaders in Europe putting up a cohesive and decisive front is slim.   In the meantime, investors are happy with the austerity measures announced by Italy's new Prime Minister Monti's and they are rewarding him by driving Italian 10 year  bond yields lower and taking the EUR/USD higher. The EUR30 billion plan is a lot to swallow but it is also what is needed to bring down the country's burgeoning debt levels.  Every single day this week will be a busy one with investors hanging onto the hope for major monetary and fiscal policy changes and their optimism could help keep currencies and equities bid. 

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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.