EUR/USD Daily Fundamental Analysis for August 09, 2011

The EUR/USD started the week on Monday with heavy volatility and fluctuations amid rising pessimism and fears over the debt crisis across both ends of the Atlantic and the euro remained weak despite the ECB’s steps to calm markets.

After the decision announced over the weekend, the European Central Bank stepped in the market to calm nervous investors and shelter Italy and Spain from surrendering to rising market pressures. The ECB started the bond buying which instantly drove the bonds higher and lowered borrowing costs, yet surely did not calm nerves and the euro remained weak.

Investors see that the ECB is playing on risky grounds and will need to expand its balance sheet strongly to prevent the contagion spread to both critical nations that are too big to fail. The ECB was out of options and had to act preemptively and not leave both nations vulnerable to market speculation until they are forced to ask for assistance.

The jitters and downbeat sentiment remain dominant and sparked by Friday’s late move from S&P to cut the United States top credit rating. Fears are evident over the outlook for the recovery and the risk of falling in another recession which is now complicated by the debt crisis that also worsens with recessionary prospects, which reminds us again of the same vicious cycle seen with the outbreak of the financial crisis and that keeps the market tensed.

On Tuesday, the focus will remain on central banks and financial chiefs ability to calm the nerves and take effective measures to stem the selloff and the bear market we are entering! The G7 and G20 pledged to take “all necessary measures” to support the sentiment and ensure financial stability and growth.

The focus will mainly be on the Federal Reserve and the FOMC decision. The markets before downplayed the odds for a swift and rapid move from the Fed to expand into QE3 now, yet after the sudden move from S&P now investors expect the Federal Reserve to act and maybe not rush into quantitative easing, yet act to calm markets at least take the same steps as the ECB which instantly last week expanded the liquidity operations with the 6-month tender to ease the tension and provide liquidity which investors will also eye on Tuesday to see the extent of demand on the tender as a reflect to the financial sector’s jitters.

The data on Tuesday will start from Germany at 06:00 GMT with June trade figures, where the trade surplus is expected to narrow slightly to 14.0 billion from 14.8 billion as exports are expected with 1.0% drop following 4.3% rise and imports to drop 1.8% following 3.7% rise. The current account surplus on the other hand is expected to widen to 10.0 billion euros from 6.9 billion.

As we said, the main focus will be on the FOMC rate decision at 18:15 GMT where the Federal Reserve is expected to keep the rate at their historical low of 0.0-0.25% and might not take more actions to support the fainting recovery, nevertheless, investors are bracing for a surprise after the unexpected moves from the SNB and the BoJ and followed by the ECB with expanding the special money operations to ease the market tension and the Fed might just do so.

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