The Last Federal Reserve Meeting of the Year

The last Federal Reserve meeting of the year will take place today, the meeting will not focus on the potential rate cut and if announced it will only be a small sideline of the meeting. Today the Fed will be busy planning and discussing 2012.

While today’s meeting is likely to produce any explicit action Chairman Bernanke and associates are busy at work behind the scenes trying very hard to make the holiday season, and the outlook for 2012, a little brighter. A statement is expected at 2:15 p.m. There will not be a press conference by Bernanke.

Economists are hoping that the Fed will engineer another round of asset purchases, or quantitative easing, early next year with a good chance they will also buy mortgage-backed securities in the first half of the year, possibly as early as January, that would be a good step for the banks and would unfreeze a lot of lending power giving the banks additional liquidity.

The economy is slowly recovering, retail sales were not as good as expected for November, after all the hoopla on Black Friday, but there was a slight increase for the month. Unemployment is down, jobs are up a bit and GDP is moving along slowly but moving in positive steps, not like most of Europe.

Ben Bernanke is a slow and cautious Chairman, and he will most likely take a sit and let’s see attitude through the holidays. The Fed also needs time to see the possibilities of Europe pulling itself up before they have a full blown recession.

The purpose of the asset purchases at this juncture would be to help stabilize the financial system and alleviate interest rate risk and uncertainty. It looks more and more likely that we will hear some news about QE3 in today’s announcement as there is a good probability we will see the use of QE3 right after the first of the year.

The Fed is expected to leave the bank’s key interest rate at an historic low range of 0% to 0.25%. This will be the third anniversary of rates near zero, a sign of just how weak the economy remains.

The Fed is expected to maintain its guidance that it intends to keep rates near zero until mid-2013 given its expectations for the economy. This guidance will be central to the Fed’s discussions at the meeting.

Analysts think the Fed will spend the bulk of the meeting fleshing out details of a planned overhaul of how they signal policy plans. Some positive commentary from the Fed might drive and US markets and the USD to significant gains today.

GBP/USD Forecast Dec. 14, 2011, Fundamental Analysis

Before the FOMC meeting, the pair showed some fluctuations with more downside tendency amid mixed vibes in the market ahead of the year-end holidays.

The Fed is expected to keep interest rate at its low level of 0.25%, while, on the other hand, the BoE kept interest rate at 0.50% and APF at 275 billion pounds last week.

In the market, the sentiment was mixed with more downside tendency after Fitch raised concerns that debt woes in the euro area would continue in 2012 as it said on Monday the decisions announced in last week’s EU summit, which Fitch described as incomprehensive, are not enough to ease pressure on the euro zone nations.

On the other hand, a successful bond selling by the EFSF and the Spanish government made some improvement in the sentiment.

The ESFS sold 1.97 billion euros of 91-day notes with an average yield of 0.2222%, while the Spanish government also saw a successful bond selling which witnessed higher demand and lower yield. The Treasury sold 4.94 billion euros of 12-month notes with an interest of 4.050% from 5.022% the previous auction. The demand climbed to 3.14 times compared with 2.13 in the prior auction.

Data from the U.K. did not have much impact on the pair’s movement. U.K. inflation rate slowed down to 4.8% in November, according to the consumer price index annual gauge.

The data came in line with expectations and the latest BoE forecasts which noted that inflation will retreat sharply within the course of 2012 and continue its fall till it approaches the target by the end of 2012.

Thus, amid the current slowdown in growth and receding inflation, the BoE may increase stimulus at the beginning of 2012 to boost the economy.

Probably, the BoE will announce further stimuli after in February with the end of the 75 asset purchase program and with the release of the coming inflation report that will provide an update about the latest growth and inflation outlooks.

Europe’s Possible Downgrade Weighs on Sentiment

Pessimism continues to dominate markets as rating agencies warn from mass downgrades in Europe which could pose significant economic threats on a global scale, raising concerns among traders and push them to seek safe havens.

Europe’s possible downgrade is weighing down on markets since yesterday when Moody’s said European nations still face the risk of credit ranking downgrades since the outcome of the European summit was disappointing.

Meanwhile Fitch said that the solutions offered by the European leaders last week are not strong enough to prevent a “significant economic downturn” in the region, fueling believes that Europe may be entering a “mild” recession.

As markets continue to price a possible downgrade in Europe while the global economy may be further damaged byEurope’s debt crisis, downside pressures on the higher yielding assets persist.

Thereby the MSCI Asian pacific Index was down 1.2% at 15:24 inTokyo, where Nikkei 225 fell 1.17% while Hang Seng was down 0.69%. In Europe stock indexes are mixed with CAC 40 falling 0.14% while DAX rose 0.36%.

Yet the gains may be short-lived as confidence in Germany continues to be very weak in Dec., while the EFSF is preparing for an auction worth 2 billion euros of 91-day bills, Greece will sell 1.25 billion euros of 182-day bills, Belgium will sell 1.2 billion euros of short-term debt, and Spain will sell 364-day and 553-day bills.

Confidence will be put to the test again later today, as theU.S.will release the retail sales figures for Nov., while FOMC will announce its monetary policy decision that is expected to remain unchanged yet the Feds might put the final guidelines for its new communication strategy.

The euro fell to a two-month low trading around 1.3190 as of this writing, after the USD reached the highest today at 79.62. The pound is trading around 1.5595 with a slight upside momentum after the CPI matched expectations of 4.8%.

The yen rose today as demand on safe haven intensified trading around 77.80 as of this writing. The AUD rose today trading around the 1.0106 after the Australian government bonds rose today with the 10-year note yield reaching a record low.

The dollar’s bullish momentum due to the fragile sentiment on concerns over Europe’s troubles, pushed gold to a 7-week low trading around the $1664.30 after the precious metal broke the physiological support found at 1700.00 yesterday. Oil is moving in a tight range today around the $98.00 level.

Asian Markets Fall – European Markets Open Flat Another Day of Waiting on Europe

European exchange markets opened mostly flat on today, as banks continue to declining.

The Stoxx Europe 600 index increased slightly 0.3% to 236.76, with shares of Barclays down 2.4% and BNP Paribas SA losing 2.4

The German DAX 30 index moved 0.4% to 5,808.88. The French CAC 40 straight lined at 3,088.47. The FTSE 100 index rose 0.1% to 5,435.49.

It feels like the calm before the storm. Everyone is sitting tight, hoping for the best and knowing bad is about to come.

Asia indexes dropped today, with exporters and resource stocks weak after multiple ratings agencies issued a weak assessment of European leaders’ latest plans to stem the debt crisis.

“The sell-off in Asian markets is feedback to the euro zone news, and [losses] in the U.S.,” Peter Lai, Hong Kong-based director at DBS Vickers said. “Investors are dumping shares connected to the euro zone, the exporters.”

Japan’s Nikkei fell 1.2% to 8,552.81, South Korea’s Kospi dumped 1.9% to 1,864.06 and Australia’s S&P/ASX 200 index fell 1.4% to 4,193.40.

China’s Shanghai Composite plunged 1.9% to 2,248.59 for its fourth-straight day of losses, while Hong Kong’s Hang Seng dove 0.7% to 18,447.17 and Taiwan’s Taiex slid 0.8% to 6,896.31.

Asian headlines this morning read “Asia Markets Fall as European Optimism Fades.” This says it all.

The early morning currency markets are following the path of the indexes. The euro traded at $1.3186 on today, down a bit from the close yesterday.

“There is still some way to go before a turning point in the euro crisis is reached. One reason being the apparent lack of firepower to support sovereign bonds, particularly from the European Central Bank,” said the Credit Agricole strategists.

The ECB said Monday it had sharply slowed its sovereign-bond purchases last week to €635 million ($850 million) from €3.7 billion the week before, as it apparently took advantage of a market rally spurred by hopes of a deal ahead of the summit. Its disclosed purchases since it launched the program last year total €207.6 billion.

French President Nicolas Sarkozy on Monday stated in regards to Standard and Poor’s possible downgrade of French sovereign debt “For the moment, they have maintained the triple-A. If they take it away from us, we would confront the situation with cool heads and calm. It would be a difficult, but not insurmountable,” But the markets were less calm. The yield on benchmark 10-year Italian bonds rose from 6.34% to around 6.52%—after climbing to 6.74% earlier Monday, according to Tradeweb. The yield The markets today continued to push bond yields high  Spanish 10-year bonds was a fraction higher at 5.73%, having risen as high as 6.02% Monday. Five-year Italian bond yields raised three basis points to 6.70%, after reaching the psychological threshold of 7% earlier in the session. A basis point is 1/100th of a percentage point.

There is a total lack of confidence in the leaders of the EU, while the ECB and IMF have moved to the sideline.

It looks like the EU ministers will be summoned to an Emergency EU Summit, to deal directly with the short term crisis. The markets are forcing the issue; political leaders around the globe are demanding a plan, the rating agencies are pushing and the banker are screaming. Let’s see what the Merkel-Sarkozy partnership will do.

 Today’s Financial Jargon

Sovereign Bond

A debt security issued by a national government within a given country and denominated in a foreign currency. The foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder.

The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy. Because of default risk, sovereign bonds tend to be offered at a discount. Brady bonds, which are issued by governments in developing countries, are a popular example of sovereign debt securities. (from investopedia )

 

GBP/USD Forecast December 13th, 2011, Technical Analysis

GBP/USD fell hard on Monday as the markets continue to trade with a “risk off” attitude. The crisis in the EU continues to weigh upon any currency that is farther out on the risk spectrum, and with this in mind the falling of cable makes total sense. Because of this we like selling rallies going forward, and will continue to do so unless we close above the 1.57 level. The 1.55 level below is support, and that goes as low as 1.53 as far as we can see. The pair looks weak, and if we can break below that level – this pair falls much, much further.

GBP/USD Forecast December 13th, 2011, Technical Analysis
GBP/USD Forecast December 13th, 2011, Technical Analysis

Moody’s and the Markets Respond to the EU Decisions

Moody’s said yesterday that they still intend to revisit the ratings of all European Union countries during early 2012, given “the continued absence of decisive policy measures.”

Also the ratings agency placed eight Spanish banks and two holding companies on review for possible downgrades.

Yesterday, rating agency Fitch stated the inability by European Union leaders to devise a “comprehensive” fix to the region’s debt crisis had intensified pressure on debt ratings of euro-area nations. Fitch continued their statement saying that the euro-zone crisis could be expected to linger into 2012

Moody’s said the crisis remains in a “critical and volatile stage, with sovereign and bank debt markets prone to acute dislocation which policy makers will find increasingly hard to contain.”

Fitch said that a comprehensive solution to the sovereign debt crisis in the euro zone “is not on offer” and that European Union officials are responding through incremental measures.

The view is that last week’s EU summit took a “gradualist” approach that “means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain a broad economic recovery.” The ratings company projects a “significant” economic downturn across the region.

They further stated “Our forecast of 0.4% euro-zone GDP growth next year and 1.2% in 2013 would be significantly higher if there was a comprehensive solution to the crisis,” The agency said it still believes that the European Central Bank “is the only truly credible ‘firewall’ against liquidity and even solvency crises in Europe.”

Many economists, financiers, bankers and politicians are demanding that the EU reconvene the summit to discuss how to deal with the immediate problems. The new fiscal pact and treaty modifications will not be approved, if they are, until spring 2012, and they will most likely have modification and changes.

The outcome was supported by the ECB and the IMF, but they also have their hands tied, as they need to understand how Europe is going to deal with the immediate crisis and no direction has been provided.

On Monday investors showed their dismay, selling off European banks and European exports shares as well as shares of companies that base their income on sales to the eurozone nation.

 

Asian shares continued to plummet on this morning, after having time to review the comments by Fitch and Moody’s. Standard and Poor’s also continued their advisement from last week that they will be reviewing sovereign debt for a downgrade after the first of the year and have placed them on negative watch.

Japan’s Nikkei 225 (NKY) decreased 1.4 percent, while South Korea’s Kospi Index fell 1.7 percent. Australia’s S&P/ASX 200 index dropped 1.5 percent. Hong Kong’s Hang Seng Index slipped 1.2 percent. The Shanghai Composite Index lost 1.1 percent.

The euro continues to drop as recession looms. The euro fell to its lowest level in two weeks — $1.3177 — before recovering slightly to $1.3188 by late trading

Optimism Fades Over EU Summit Draft after Moody’s Reignite Debt Crisis Concerns

Following optimism over the EU Debt accord on Friday, markets awaked early Monday on new fears that Europe’s debt-trapped nations could be actually downgraded in the next quarter by one of the world’s biggest credit rating agencies. Traders went jittered, stocks slumped sharply, euro dropped and the dollar gained.

Earlier Monday, Moody’s Investors Service said in a statement that it will review the rating of European Union nations in the first quarter of 2012, after last week’s summit failed to craft a credible measure to halt the debt crisis, leaving the euro zone vulnerable to further possible shocks.

More failure to produce effective measures to break the debt impasse in the euro zone fueled fears the European outlook is yet to worsen. Traders went skeptical and began to weigh last week’s summit, with more disappointments after the EU Leaders “mostly” agreed-on new government treaty failed to quell market jitters.

And though Italian and French debt auctions went well with a slight drop in yields at the auction and good demand, yet still was offset by prevailing pressure and rising yields on the benchmark 10-year bonds in the region, especially for Spain that rose again above 6.0, pointing that last week’s optimism was barley seen today.

The U.S. dollar build up momentum against its peers on Monday, after the US dollar Index opened at 78.75 levels and picked up to trade around 79.37. The Euro fell the most in two weeks against the Dollar, where the EUR/USD pair trades 1.3184, compared with the opening level at 1.3370, the British Pound fell slightly against the Dollar.

The GBP/USD pair trades around 1.5592, compared with the opening level at 1.5653. Japanese Yen strengthened on Monday but little changed versus the dollar, after the USD/JPY opened at 77.61 level and currently trades around 77.87.

Stocks in the United States were lower after opening on Monday, as the Dow Jones Industrial Average traded below the 12,000 level with a 1.61 percent drop, while the S&P 500 index was down 1.85% to trade around 1232.

European stock indexes were also lower before closing on Monday, where FTSE 100 was down by nearly 1.62% to trade around 5438 and the DAX was down by nearly 3.2% to close around 5795.

After the dollar rebounded strongly on Monday, gold prices dropped heavily to currently trade around $1663 after opening at almost $1711 an ounce, while crude oil prices fell as well after opening at $99.49 to trade around $98.21 a barrel.

GBP/USD Forecast Dec. 13, 2011, Fundamental Analysis

The GBP/USD fluctuated heavily with the start of the week on risk aversion and a strong dollar that kept the pair biased to the downside.

The volatility remains high for sterling with investors avoiding any risk especially with the vulnerability of the UK in particular to the worsening status in the euro area and risk of the spreading debt crisis. The currency also remained weak with the risk aversion supporting the dollar as investors saw the EU summit did nothing to end the crisis and Moody’s warning for downgrades intensified the jitters.

Tuesday will be more volatile for the pair and trading is likely to remain biased to the downside ahead of the FOMC decision where the feds are likely to keep their policy unchanged and with the rates to be held at the record low range near zero. Nevertheless, any signal from the Feds that they are ready to take new decisions to support the economy or even QE that might support the sentiment and accordingly weaken the dollar accordingly yet overall the bias for the pair remains to the downside still.

CPI and RPI data will grab attention at 09:30 GMT where expectations refer to decline in CPI annual reading for Nov. to 4.8% from the prior 5.0%. The data is predicted to have an impact on the pair if it came much higher or lower than forecasts.

The United States will join the session at 13:30 GMT with the retail sales index for November, where the advance retail sales index could have expanded by 0.6% from 0.5%, while the retail sales less Autos index could have advanced by 0.5% from 0.6%.

At 15:00 GMT the United States will provide the business inventories index for October, which could have improved 0.4% from the previous steady reading.

At 19:15 GMT the Federal Open Market Committee (FOMC) will announce the rate decision (DEC 13), with expectations the Federal Bank could have left rates unchanged at 0.25%.

Risk Aversion as Euphoria Over Europe’s Rescue Deal Fades

Concerns about the euro zone’s safety persist as the euphoria over Europe’s rescue deal is fading since investors consider the measures to be insufficient to prevent the spread of the debt crisis, while inChinaexports rose by the weakest pace since 2009.

In Asia this morning, confidence and risk appetite were sustained by the improvement in the US consumer confidence which rose to a 6 months high last Friday, while European leaders revealed last week a blueprint for a fiscal deal aimed to save the euro union.

However, as the excitement over Europe’s rescue deal started to fade, worries overEurope’s growth were reignited, especially since the deepening debt crisis is starting to disturb global trading and limit demand on exports, pushing the Chinese exports to the weakest in more than two years.

As the Chinese economy seams to be slowing down, and inflations proved to be softening, Chinese policy makers are expected to start loosen their monetary policy to sustain growth. Thereby Nikkei 225 rose today by 1.37% and Australia’s S&P/ASX 200 Index rose 1.18%.

In Europe however stocks are dropping as investors are uncertain about the rescue deal. FTSE 100 fell 0.53% while DAX fell 1.27% asItalyis preparing to sell 7 billion euros of one year bills today, while France is preparing to sell 6.5 billion euros of short-term debt in an auction.

While Europe will lack the economic data today, and the US will only release the monthly budget statement for Nov., investors are seeking the safe haven USD which is trading with strong bullish momentum around the 79.20 level, pushing the higher yielding assets sharply to the downside.

The euro is trading with strong bearish momentum around the 1.3260 from the opening at 1.3378 while the pound is trading around the 1.5544 level from the opening at 1.5651. The yen also weakened trading around the 77.81 level, while the AUD is trading around 1.0110 from the opening at 1.0208.

The dollar’s bullish momentum is imposing downside pressures on commodities, while oil is trading around the $98.00 per barrel level from the opening at $99.54, while gold is trading around the $1678.50 per ounce level from the opening at $1712.60 per ounce level.

The Euro, Banks and Markets Drop in the EU

Early this morning, Moody’s downgraded the financial ratings, and long-term debt and deposit ratings for BNP Paribas, Societe Generale and Credit Agricole.

Moody’s reduced the long-term debt rating of BNP Paribas, France’s largest bank by market capitalization, to Aa3. Societe Generale, the second-largest, was downgraded to A1, and Credit Agricole to Aa3.

These downgrade are after  the European Banking Authority said it estimated French banks needed to increase their capital by just €7.32 billion–significantly below its October estimate of €8.8 billion–to comply with tougher rules intended to help stabilize the euro zone.

While the downgrade only brings Moody’s in line with other agencies’ ratings of the big three, it once again highlights significant concerns about French banks.

Despite their efforts to shrink their balance sheets in a bid to increase capital buffers and reduce financing needs, French banks continue to face major liquidity and funding constraints, and remain significantly exposed to the sovereign debt of troubled Southern European states, Moody’s said.

The downgrade is the consequence of increasingly difficult market conditions and the recent move by Standard & Poor’s to put France’s own rating on review for a downgrade.

The markets are expecting comments today by S&P in response to Friday’s outcome of the EU Summit.

Markets on Friday were little affected and Asian markets soared this morning catching up on Friday’s news.  But as the morning progressed, the markets began to show disillusion with the response by the EU.

Everyone is in agreement that the new “fiscal pact” will be good in the future to keep the eurozone countries inline and within a balanced budget but the outcome has little effect on the current situation.

Even though the ECB has pledged to maintain liquidity in the banks, there are too many factors weighing on the financial systems and Europe seems to be sidestepping the immediate problems

The euro maintained strength on Friday, but as the markets began to open on Monday, the euro began to fall.

Problems began to develop shortly after the announcements on Friday of the future plans for the EU. Within hours the IMF was having problems getting additional funding from non EU members as there was not a direct plan or goal to help the countries by the EU. The EFSF was not defined or expanded and the new EU pact will not be finalized until spring, leaving markets and investors in turmoil.

Banks moved lower, with HSBC Holdings PLC dropping 1.3%, Banco Santander SA down 1.4% and Standard Chartered PLC off1.7%.

The German DAX 30 index fell 1.2% to 5,912.53.

Shares of Societe Generale SA lost 2% in Paris, pulling down the French CAC 40 index 1% to 3,139.27.

The FTSE 100 index fell 0.4% to 5,506.28 Banks also fell in the UK, with Lloyds Banking Group PLC Royal Bank of Scotland Group PLC   each dropping around 2%.

 

 

 

Asian Markets Open With A Bang While The Rest Of The World Contemplates The EU Debt Crisis

Asian markets shot up this morning in response to Friday’s announcements from the EU Summit and the ECB. Asian exchanges were closed by the time final decisions were became public on Friday. Following the release of the “fiscal plan”, US markets rebounded on Friday.

Japan’s Nikkei Stock Average jumped 1.3%, Australia’s S&P/ASX 200 index increased 1.2% and South Korea’s Kospi was up 1.1%.

This morning Australia released their latest trade and export data, Australia’s seasonally-adjusted trade surplus declined to 1.6 billion Australian dollars ($1.6 billion) in October, from A$2.2 billion in September, the Australian Bureau of Statistics reported Monday. Exports totaled A$27.3 billion in seasonally-adjusted terms, while imports totaled A$25.7 billion, according to the ABS data. Economists were disappointed in the 1.6 billion surplus they had been expecting a trade surplus of A$2.0 billion.

Yesterday, the Bank of International Settlements  wrote in their quarterly release an endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks.

“A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS report further stated. “Only the currency-issuing central banks have this ability.” The BIS’s paper was its latest in a series analyzing the concept of global liquidity, and focused again on the interplay between official liquidity, that is, created by central banks, and the far greater liquidity created by the private sector on the basis of central bank money.

Economists, government finance ministers, and investors have had the weekend to digest the volume of news and plans released last week ranging from the UK departure from the EU, the ECB interest rate reduction and comments, the “new fiscal pact” for Europe, the short term and long term effects on the debt crisis throughout the world.

The biggest fear for now is, on the short term, the austerity measures each government will need to impose will effectively put the brakes on European economies and growth.  The eurozone leaders today have by passed a plan to deal with the current crisis, their new pact although a way to prevent future problems, does not deal with the current debt crisis in Europe. Germany and France have used these difficult economic times and global pressures to manipulate the countries of the EU into this pact without dealing with the current problems. The fiscal pact will take months to be finalized, and is just the starting point for negotiations between EU members.

If the markets lose faith in the EU leaders, or to much bickering and trouble erupts while trying to implement this new pact, the markets could react severely. Merkel and Sarkozy are only safe as long as the markets believe they can pull their plan off. As to the current situation, the markets are nervous, investors are worrisome.

This leaves the global economy exposed to further financial turmoil in the weeks and months ahead. Already, emerging markets are facing a credit squeeze as Europe’s banks sell assets and bring money back home to strengthen their balance sheets. This looks set to worsen after the European Banking Authority last week said the region’s banks must raise 115 billion euros in extra capital.

International trade credit also is tightening as European sovereign credits are downgraded, pushing the cost of government-backed trade insurance above those for emerging countries.

The U.S. is alone among major developed economies in reporting its economy is gradually improving. Consumer sentiment brightened in early December, auto sales are climbing, order books are filling up and unemployment is retreating. This will strengthen its resilience against the global slowdown and Europe’s woes. It by no means says that the U.S. is out of economic woes and this good news can turn bad quickly. No country is a financial island. We would feel the effects of the slowdown spreading in the first quarter of next year.

If the European crisis is contained, analysts say it will shave only a few tenths of a percentage point off U.S. GDP growth, currently seen around a 2.5 to 3 percent rate. But the financial contagion could worsen and pull down growth.

The Federal Reserve at its Tuesday meeting is expected to take no fresh action to support growth, although it may discuss ways to communicate the future path of its monetary policy in preparation for any additional easing measures next year.

Much of Europe is widely seen as already in recession. Even in Germany, the euro zone’s powerhouse, the central bank slashed its 2012 growth forecast last week to 0.6 percent from 1.8 percent. An early read of the PMI manufacturing survey due on Thursday will measure the speed of the downturn.

The world still sits and waits on Europe’s grand plan, the ECB and the IMF seem to be in holding patterns. The IMF is facing difficulties raising funds as countries want to know their exact plans and guarantees before adding money to their emergency funds.

There should be a lot of stress on the euro and the gbp this week.

GBP/USD Forecast Dec. 12th, 2011, Technical Analysis

GBP/USD had originally gained on Friday, only to fall again from the 1.57 resistance area. The resulting candle is a shooting star, and the pair simply looks too weak to overcome this area. The market is becoming a very simple one for scalpers – just sell it when it gets fairly close to the 1.58 level. The 1.56 level seems to be supportive, but one has to wonder how much longer the support can hold as the pair simply keeps rolling over. It is probably only a matter of time, which is why we prefer selling the rallies instead of trying to buy at support.

GBP/USD Forecast Dec. 12th, 2011, Technical Analysis GBP/USD Forecast Dec. 12th, 2011, Technical Analysis

GBP/USD Forecast for the Week of Dec. 12th, 2011, Technical Analysis

The GBP/USD pair rose back above the 1.57 level several times this week, and has since been falling. This makes the pair look very vulnerable as the level simply cannot be overcome by the cable bulls. The pair looks more and more like a complex head and shoulders is forming, and a break below the 1.53 level would confirm this. If we get that – we think 1.43 is very likely in the long run. With this in mind, we prefer selling rallies at this point as buying is proving to be somewhat fruitless at this point.

GBP/USD Forecast for the Week of Dec. 12th, 2011, Technical Analysis GBP/USD Forecast for the Week of Dec. 12th, 2011, Technical Analysis

The EURO Survives

It was a crazy week. Markets Up and Markets Down, the EURO up and the EURO down. Oil hits highs, and gold falls. All week no one knew exactly what to expect. As the week, drew to the grand finale, the EU Summit, investors nerves were frayed. Traders did not know what to expect.

Early, in the week, the Euro was strong, due to statements from Sarkozy, Merkel and the ECB. It looks like great strides were made. Plans were being formulated and agreements been negotiated. By mid-week, the President of the ECB threw a wrench into the plans and made some negative comments and the euro plunged. The EUR/USD was gaining strength and the US dollar was picking up momentum.

From the sidelines came the warning from S & P on the possible future downgrade of many European nations. A bleak warning of what was ahead. Global markets fell and currencies dropped.

As the week came toward the crescendo, Mario Draghi, President of the European Central Bank, really tossed a lion into the den of sheep. First the ECB lowered their interest rate by .25% a move that the markets were predicting.

This was followed up by announcements on Thursday at the conclusion of the ECB meeting, in which ECB President Mario Draghi laid out 3-pillars for the “Fiscal Compact”.

He also stressed the ECB will not use QE nor will it purchase unlimited amounts of European bonds. The EUR fell below the 1.33 level following the disappointing comments. ( read the full statement )

Mr. Draghi remarked that he was “kind of surprised” at how markets spun his earlier comments. But he shouldn’t have been, analysts say, given how focused investors around the globe were for any tidbit of his thinking.

News began to leak out of the EU Council and the EU Summit and then became evidently clear that David Cameron, UK Prime Minister, would not agree to the new treaty without additional guarantees, that Merkel and Sarkozy, were not about to offer or accept. Depending on your view point, they either forced the UK out of the EU or Mr. Cameron, walked.

Still the markets were amazingly quiet. All predictions and suggestions were for turmoil all day on Friday, with disastrous effects on the Euro. But there was little movement and the Euro ended up in positive territory.

Global Watchers have been totally surprised by the fact that Merkel and Sarkozy were able to offer a new pact to the remaining EU countries without Britain and find mutual consensus not just among the 17 nations on the eurozone but also of an additional 6 other EU member states. It looks like the EU will survive, with new rules and regulation, and that the ECB will support this move.

Again markets did not surge or plunge. Investors seemed to be shocked and amazed. The comments heard on the exchanges were diverse, but the overall opinion, was at least the EU Ministers showed leadership and a plan. It is still a difficult road ahead and tensions will grow, many countries will have difficulty implementing the new fiscal pact, many countries will have to explain austerity measures to their citizens.

The EURO Survives

The world is hoping that we have the first steps of global recovery. It looks like all parties are working together. How will the markets react this coming week is a guess. What is going to happen when investors and economists have had time to interpret this new accord? No one knows but it will be a bouncy ride in the short term.

GBP/USD Forecast Dec. 12, 2011, Fundamental Analysis

While the U.K. lacks fundamentals, the U.S. will announce monthly budget statement at 19:00 GMT, where expectations refer to a narrow in deficit to $140.0 billion in Nov. from $150.0 billion a month earlier.

The pair is expected to follow the general sentiment in the market which will probably continue to track the latest developments in the euro area. With tensions in markets, the dollar is predicted to take the pair lower and vice versa.

This week, the main focus will be on inflation data from both economies in addition to other important data, where attention will be toward the FOMC rate decision.

Last week, the U.K. preferred to act solely as appeared clearly in the EU summit as the U.K. rejected the treaty change as British Prime Minister David Cameron asked for guarantees to protect the financial services industry, where Cameron’s demand was described as “unacceptable” by French President Nicolas Sarkozy.

The BoE, on the other hand, opted to leave interest rate unchanged at 0.50% and stimulus at 275 billion pounds in December, to assess the impact of the 75 billion pounds announced in October.

Also, the BoE said it will introduce a new contingency liquidity facility, in response to the turbulences engulfing financial markets, where this facility would allow the bank flexibility in offering sterling liquidity on short term basis in case of any shortage stemming from the volatility in markets.

Still, uncertainty from the euro area debt crisis is largely determining the outlook for U.K., as mentioned recently by many U.K. officials.

GBP/USD Weekly Forecast Dec. 12-16, 2011, Fundamental Analysis

The GBP/USD gained for the second week in the week ended Dec. 9 after European leaders agreed to toughen budget rules, lend the IMF bilateral loans up to 200 billion euros to help debt-trapped nations and increase the capacity of the ESM to 500 billion euros.

Eyes were on the EU summit as investors waited to see decisive measures to tackle the debt crisis. The measures were considered acceptable despite the fact that EU leaders did not succeed to get approval of all 27-EU members to change treaty.

The decisions made by European leaders in addition to the ECB cut to interest rate by another 25 basis points to 1.00% and adopt of non-standard measures to give access to liquidity to banks improved the sentiment and enhanced risk appetite.

This week, the main focus will be on inflation data from both economies in addition to other important data, where attention will be toward the FOMC rate decision.

The release of the data this week will be as follows:

Monday Dec. 12:

While the U.K. lacks fundamentals, the U.S. will announce monthly budget statement at 19:00 GMT, where expectations refer to a narrow in deficit to $140.0 billion in Nov. from $150.0 billion a month earlier.

Tuesday Dec. 13:

CPI and RPI data will grab attention at 09:30 GMT where expectations refer to decline in CPI annual reading for Nov. to 4.8% from the prior 5.0%. The data is predicted to have an impact on the pair if it came much higher or lower than forecasts.

For the US, at 13:30 GMT, the market’s attention will be on retail sales for Nov. where both readings, less auto and excluding auto & gas, are expected to record 0.5% rise compared with the prior 0.6% and 0.7% respectively. At 19:15 GMT, the FOMC will announce its rate decision for Dec. 13 with expectations showing that there will be no change in interest rate that will remain at 0.25%.

Wednesday Dec. 14:

Unemployment data from the British economy will be out at 09:30 GMT, where ILO unemployment for the three months ended Oct. will linger at 8.3% while jobless claims will incline to 13.6 thousands in Nov. from 5.3 thousands a month earlier.

Thereafter, U.S. MBA mortgage applications for Dec. 9 will be available at 12:00 GMT; one hour and a half later, with lower relevance, import price index is due.

Thursday Dec. 15:

At 08:30 GMT, the UK will release retail sales for Nov.; analysts are predicting 0.4% drop in the reading with auto fuel from 0.6% advance in Oct. As of 13:00 GMT, CBI trends for the month of Dec. will be available.

For the US, eyes will be on a batch of US data including the release of PPI for Nov. at 13:30 GMT, where the annual reading excluding food and energy will be steady at 2.8%, according to median forecasts. At the same time, both empire manufacturing for Dec. and jobless claims report will be out. At 14:15 GMT, industrial production and capacity utilization for July will be out.  Thereafter, particularly at 15:00 GMT, Philadelphia Fed will be available.

Friday Dec. 16:

The week ends with the release of no fundamentals from the U.K., while the U.S., at 13:30 GMT, will release CPI which is expected to linger at 3.5% in the year ending Nov., where the reading excluding food & energy is predicted to steady at 2.1%.

EU Summit Decisions Lift Up Debt-Crisis Optimism Once Again

Financial markets were dominated with fresh sentiments and new hopes on Friday, after European leaders agreed to toughen budget rules, lend the IMF bilateral loans up to 200 billion euros to help debt-laden nations and boost the capacity of the ESM to 500 billion euros.

The measures were considered credible though EU leaders failed to get approval of all 27-euro members to a change treaty, anyhow, the newly-born intergovernmental treaty, which will include the 17 euro-area nations besides to any EU country that would like to join, is now the key vaccine to cure debt crisis.

The decisions made by European leaders in addition to the ECB cut to interest rate by another 25 basis points to 1.00 percent, and the adopt of non-standard measures to give access to liquidity to banks improved the sentiment so far and enhanced risk appetite before weekend.

While jumping to the world’s largest economy, gains were triggered following the European debt accord and quite cheerful economic reports as well, as both consumer confidence and the U.S trade balance beat median estimates, adding to hopes the economic momentum will support the overall global economic recovery.

U.S consumer confidence exceeded forecasts as reported this morning, rising to 67.7 in its preliminary reading for December from 65.8 in November, according to University of Michigan survey, while also the U.S Department of Commerce U.S reported earlier the U.S trade deficit narrowed 1.6 percent to $43.5 billion from $44.2 billion is September.

The U.S. dollar fell slightly after rebounding to the upside against a basket of major currencies on Friday, where the U.S. dollar index was trading at 78.77, compared with the opening level at 78.85. The Euro rose faintly following a two-day low against the Dollar, where the EUR/USD pair traded at $1.3376, compared with the opening level at $1.3345.

Moreover, the British Pound edged up a little bit against the Dollar, where the GBP/USD pair traded around $1.5651, compared with the opening level at $1.5635, and the U.S. dollar was little changed against the Japanese Yen, where the USD/JPY pair was trading near 77.54, compared with the opening level at 77.68.

Stocks in the United States were higher by opening on Friday, as the Dow Jones Industrial Average was up by nearly 1.3% to trade around 12,158, while the S&P 500 index added nearly 1.4% to trade around 1,251. European stock indexes were also higher before closing on Friday, where FTSE 100 was up by nearly 0.8% to trade at 5528 and the DAX was rose nearly 1.9% to close around 5986.

Gold prices inclined today to trade now around $1715 after opening at level of $1709 an ounce and crude oil prices were merely changed after opening at $98.19 level to steady up around $98.45 a barrel.

Markets Disappointed by the EU Summit Results

After the sharp losses seen yesterday, markets are moving in tight ranges ahead of the weekend, as trading is light since many investors closed their positions to lock on profits following the disappointment felt when the results of the EU’s summit were announced.

European leaders managed during the summit that started yesterday to agree on a new fiscal pact that ensures tougher budget disciplines, yet after nearly 10 hours of intensive talks they failed to agree on a treaty that would involve the 27 member nations, so the deal will involve for now the 17 euro zone nations.

EU leaders also said the euro zone is planning to make available up to 200 billion euros to the IMF to strengthen its resources that would be effective as soon as possible, while ECB’s president Mario Draghi hinted that any bond purchase program is not considered at the time being.

Sentiment deteriorated further after Moody’s downgraded three French banks BNP Paribas, Societe Generale, and Credit Agricole due to the fragile and deteriorating operating environment for European banks. BNP and Credit Agricole  were downgraded to Aa3 while Societe Generale was downgraded to A1.

Meanwhile in Asia, South Korea’s central bank cut the 2012 growth forecasts dramatically to 3.7% from 4.6%, while China’s inflation fell to the lowest since Sep. 2010 at 4.2% from 5.5% previous, and the industrial output grew by the slowest pace in more than two years during Nov. by 12.4%.

The Chinese data signal weaker growth and open the way for more stimulus measures as economic conditions are deteriorating since the downside risks generated by Europe’s debt crisis are widening. As European leaders failed to boost investor confidence, losses were seen across the Asian stocks markets.

Nikkei 225 fell 1.48% while Hang Seng was down 2.73% at closing. However in Europe stocks are mixed after Angela Merkel said she is very satisfied with the agreement since it is not a “lousy compromise”, while some investors expect the ECB to buy Italian bonds. DAX fell 0.1% while CAC 40 rose 0.17%.

Although there are numerous economic data today, it is more likely that it wont grasp any of the markets’ attention as the focus remains on the European leaders. In Germany, the trade balance disappointed after exports fell by -3.6%, while the CPI came inline with expectations.

In UK the producers price index fell in Nov. from the previous month, yet not as much as expected.Canada will release later today its trade balance for Oct., while the US will release its consumer confidence report for Dec. expected to improve and the trade balance for Oct. expected to show wider deficit.

The currencies are moving in tight ranges today ahead of the weekend, with some bullish momentum after the European markets opened trading. The USD is trading around the 78.75 level while the euro is moving around the 1.3360 level. The pound is trading around 1.5645. The AUD is trading around 1.0120.

The yen weakened slightly today trading around the 77.70 level. The dollar’s bearish momentum helped commodities compensate some of yesterday’s losses, where oil is trading around $98.40 per barrel while gold is trading around the $1714.40 per ounce level.

EU Summit Fails To Get 27 Nation Support

European Union summit has failed to secure the full backing of the 27 nations for treaty changes to help fight the region’s debt crisis by coordinating fiscal policy, according to reports. Citing unnamed diplomats and senior European officials the reports said that the summit talks would now concentrate on forging an agreement between the 17 euro-zone members and any other countries that wanted to join.

No one knows where these meeting will lead. This will leave the markets in turmoil on Friday morning.

A full agreement fell through after the U.K. asked for concessions that France and Germany weren’t willing to give, according to a Reuters report.

Ministers and Leaders started what are being viewed as make-or-break talks for the eurozone at dinner Thursday, and the talks went on into the early hours of Friday morning.

Prior to the summit on Thursday, UK Prime Minister Cameron, President Nicolas Sarkozy and German Chancellor Merkel held 45-minute talks, but sources said there was “no movement” with each side setting out their respective ground. David Cameron has repeatedly warned he will veto anything which harms British interests.

By late Thursday night, a set of draft conclusions began circulating in Brussels and were leaked to several news agencies.

The draft text sets a limit on structural deficits of 0.5% of GDP, compared with the present limit of 3% including debt repayments.

It also includes a way of increasing the firepower of the eurozone bailout fund above 500bn euros (£426bn; $670bn) – a measure which Germany has staunchly opposed.

The Prime Points:

  1. The European Commission to have the power to impose penalties for nations that run excessive budget deficits
  2. All 17 eurozone nations should amend their national legislation to require balanced budgets
  3. The eurozone countries to have common corporation and financial transaction taxes
  4. Any future bailouts would not require private investors to absorb part of the costs, as happened in the case of Greece

GBP/USD Forecast Dec. 9th, 2011, Technical Analysis

The GBP/USD pair poked above the 1.57 level on Thursday as traders got long of the pair on optimism about the outcome of the EU summit. However, as headline after headline came out, the markets got more and more disappointed in the possible outcomes, not to mention the lack of bond buying by the ECB made the “risk off” trade the one to go with. The 1.58 level has held yet again in this pair, and the pressure to the down side is certainly building.

With this in mind, we are expecting the 1.58 – 1.55 level to be the consolidation that the pair chooses in the short-term. The 1.55 level is the start of massive support down to the 1.53 level. The breaking of the 1.53 handle would have us selling very aggressively as it would be a major break of support in this pair. The cable pair is very risk-sensitive pair, so that fact that it fell isn’t much of a surprise, and the problems in the EU are going to have a severe effect on the cable and Pound specifically. The UK sends over 30% of its exports to the EU, and as a result the economy in Britain will certainly be exposed to issue on the continent. Because of this, the cable pair could be just as volatile as the EUR/USD pair over the next 24 hours.

When the announcement from the EU summit comes later, the world will sit still. If the market doesn’t like the “solutions” that the Europeans come up with – this pair will fall hard. The Dollar will certainly be the currency that people will want to be in at that point in time. The safe haven status of the Dollar will continue to be a magnet for the market until the EU mess can get taken care of. All should be known by Monday morning on how the risk appetite will play out in this and many other pairs around the Forex market.

Although it looks very bearish at the moment, trading this pair before the EU announcement is probably akin to gambling. The outlook doesn’t look good, but there is always time for a surprise between now and then.

GBP/USD Forecast Dec. 9th, 2011, Technical Analysis GBP/USD Forecast Dec. 9th, 2011, Technical Analysis