Forex: Markets To Face Whipsaw Price Action Amid Debt Contagion Fears, Low Liquidity, and Korean Tension

Talking Points

• Japanese Yen: Remains Mixed Across The Board
• British Pound: Advance to be Short-Lived Amid Tough Austerity Measures
• Euro: Weighed by Ireland’s Downgrade and Contagion Fears
• U.S. Dollar: Chicago Federal National Activity on Tap

The EURUSD extended Friday’s decline to reach an intraday low of 1.3124 during the overnight trade as debt contagion fears in the Euro-Zone continue to weigh on the single currency. In particular, investor confidence as of late is under pressure amid concerns that Ireland’s debt crisis may deepen, following the downgrade of the countries credit rating by Moody’s last week, while a newspaper reported that Ireland’s government may use new powers to take full control of Allied Irish Banks, according to Bloomberg News. Indeed, the economic docket was relatively light during the European as traders were faced with German producer prices and the Euro-Zone current account. The former disappointed as figures rose a mere 0.2 percent in November after climbing 0.4 percent the month prior amid economists’ expectations of 0.3 percent. At the same time, the annualized rate advanced 4.4 percent. The report is important due to the fact that producer’s tend to pass higher costs on consumers. However producer and consumer prices are unlikely to continue their northern journey as the bloc faces increased headwinds in the coming months as governments implement tough austerity measures to battle their debts.

Meanwhile European Central Bank President Jean-Claude Trichet spoke on Europe1 radio station and said that the “serious” crisis has lasted two and a half years so far, and went onto add that policy makers are “fully” carrying out its mandate. Furthermore, the central bank head noted that the question for France is the same for all others, and reiterated that the euro remains credible. It is also worth noting that on Friday, the European Union replaced the bailout fund with a permanent crisis mechanism, which will be put into effect in 2013. However, the choice arrived to late to help the troubled the Irish economy as mentioned earlier. The detail of the new crisis mechanism is expected to be released before March. Looking ahead, the ECB is unlikely to hike rates until at least the fourth quarter of next year as policy makers allow growth to obtain a firm footing throughout the 16 member euro area before tightening policy.

The British pound pared Friday’s decline, but the advance may be short-lived as recent fundamental and technical developments paint a bearish picture for the troubled economy. The region faces a high unemployment rate, tight credit conditions, and slow wage growth. At the same time, consumer confidence in November fell to its lowest level since February as households prepare for the largest spending cuts since WWII, which will in turn weigh on growth. Indeed, the economic docket in the U.K. was fairly muted overnight; however, traders will shift their focus to the Bank of England interest rate decision, which will be released on December 22nd at 9:30 GMT. The central bank decided to keep interest rates and its asset purchase target unchanged in December. With the split amongst committee members likely to widen amid uncertainty in the economic outlook, another shift by a policy maker, calling for either higher rates or an asset purchase increase will likely dictate price action. Going forward, market participants should not rule out a test of the 200-day moving average, with a break below exposing the 1.52 area as the pair has managed to work its way into a descending channel on the hourly chart.

The greenback pushed lower against most major currencies on Monday but the advance may be ephemeral as global concerns remain. Tensions in Korea are building up, and surprisingly North Korea dismissed South Korea’s drills today in spite of North Korea threats that it retaliate if South Korea proceeds with a live firing drill on the west coast sea border. If the two regions go to war, the result will be a flight to safety, which is beneficial for the U.S. dollar. At the same time, the buck is gaining momentum on euro weakness as debt contagion fears continue to weigh on the global markets. Traders should be cautious when trading this week as limited liquidity and growing market concerns may lead to sharp intraday moves.

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To discuss this report contact Michael Wright, Currency Analyst:mwright@fxcm.com

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