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FX daily Commentary

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Euro and Pound Set to Gain This Week?

Mon, Oct 13 2008, 09:55 GMT
by Lena Manousarides

FXGreece

The week starts with European markets getting a lift since the early opening, and euro staring the week on a strong note. The reason for this change in sentiment is the outcome of G7 and the meeting of Euro group which happened this past weekend.

The world leaders came together and expressed their concerns over the latest economic crisis and also declared that they will do everything in their powers to stop the crisis from progressing by adopt new rescue plans to “save” the already troubled banking sector. The English Prime Minister Gordon Brown said that the government has a rescue plan in motion which means that 400billion pounds will be immediately available to help the banking system with the low liquidity. Europe is thinking of adapting the rescue plan too with Germany being the one who is said to raise around 500 billion for the same purpose.

It is clear that World leader are trying their best to fight the latest crisis and most analysts are saying that the best scenario we can expect is a mild global recession. The key to all this of course will be how the markets will react and if DOW JONES will continue the recent slide. Early European activity shows that traders are bit more optimistic but with the level of high uncertainty regarding the global economy this might change once again.

EUR/USD opened with a 150 points gap on Sunday and since then it continued its way up towards 1.37. On Friday before the close, we saw a big liquidation in the pair, with euro falling below 1.33 and stops getting hammered. This move was extreme and due the fact that traders were closing their positions due to the weekend.

Today’s calendar is almost empty, with only important announcement being the PPI from UK which came unchanged. Sterling was the big looser last week and we shall see how it will perform this week with CPI data coming out in the next few days. The very fact that UK government took the matters in their hands makes investors less pessimistic about the countries state of economy and from now on all eyes and ears will be on the economic data.

The fact that US dollars strength was mainly due to risk aversion and fear of crisis spilling to Euro zone is making us think that if sentiment changes from negative to less negative, dollar might get pressured once again as traders will get back to what they know best: buying euro and selling the yen, i.e. betting in riskier assets. This of course is far from reality yet, and we need to see proof that the current crisis is starting to ease. Until we need signs of stabilization, we believe the dollar will continue to get bid all across the board and carry trades will continue to deteriorate.

Watch New York open today as US Banks are closed due to national Holiday. The liquidity will be thin so we might see bigger moves later on today. EUR/USD needs to take out 1.3680-1.37 before we can say that there is more to come, however 1.3780 will be a good place to go short. GBP/USD is climbing its way higher but stalled once again at 1.72. A clear break of 1.7230 will give further gains for the pair…

Published on  Mon, Oct 13 2008, 09:56 GMT