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The Week Ahead

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Politics in the background of important data

Mon, Sep 28 2009, 11:00 GMT
by Przemysław Kwiecień

X-Trade Brokers, XTB

The past weekend was very intensive on the political front. G20 conclusions and German parliamentary elections may have important long term consequences but markets are so far focused on more short term indicators and on this front there is a lot pay attention to.

The G20 agenda had been very ambitious. Global leaders were about to tackle global imbalances and bonuses in the banking sector, among others. The latter was a bit populist and a final conclusion that banks should avoid multiyear guaranteed bonuses is a bit mild. More importantly, leaders agreed to work on global imbalances under the supervision of the IMF. The idea is to reduce Asia’s reliance on exports and US consumption propensity. However, for now it isn’t clear what exactly would be done in this direction.

In Germany, Angela Merkel may celebrate a victory and even though CDU’s results are still sliding down, SPD, a previous coalition partner and at the same time a main archrival, suffered a severe defeat. With a historical success of liberal FDP, a new CDU-FDP coalition might be more market oriented. However, any suggestions that election results might push the euro higher seem to be premature. Merkel announced additional tax cuts, and even if these may promote growth it will be at the cost of (at least temporary) large budget deficit.

In the meantime market seem to be intimidated by weaker-than-expected US home sales data for August. Combined home sales fell by 137k which is not dramatic but with markets (both stock markets and the EURUSD) close to this year’s maximums, it was enough to spark some profit taking. On the EURUSD once should notice an evening star formation on the weekly chart. After a significant rising wave, it could herald a reverse. Whether it happens, might be decided by the data flowing on the market this week. The calendar is looking impressive. After a nearly empty Monday we have Conference Board index tomorrow, Japanese PMI and output numbers together with US ADP and final GDP figures on Wednesday, activity (PMIs in Europe, ISM in the US, Tankan in Japan) figures on Thursday and finally payrolls data on Friday. Additionally Bernanke’s speech to the House Financial Services Committee (on regulatory issues) is scheduled on Thursday. Those events are much stronger and more influential than home sales data and investors both on the forex and stock markets are bound to pay attention to them.

On the forex, there are clearly many more questions than just the “profit taking or correction” on the EURUSD. The data may be a make or break for the GBPUSD pair. The Cable is trending strongly again, this time heading to the south. It is already widely known that the British currency is out of favor since the Bank of England surprised the market expanding its monetary policy while other central banks think about exit strategies. However, the pair slid through supports of 1,61 and 1,5980 touching the last support 1,5799 today in the Asian trade. This move actually closes a large head and shoulders formation, visible on the daily graph and may spell a selloff of another 8 figures (to ca. 1,50). If the data push stock markets and EURUSD lower, this scenario will become very likely.

Sellers are dominating on the USDJPY currency pair as well. Regardless of the stock market tendencies, investors are determined to test pair’s multiyear minimums (set at the end of last year and repeated in January this year) at 87,08. Today in the Asian trade the pair was just 114 points above that level.

Published on  Mon, Sep 28 2009, 11:07 GMT