The week ahead: Central bankers, Euro and UK GDP in focus

Asian shares were depressed on Monday morning, as investors remained guarded amid lingering concerns over U.S. tax reforms.

The caution from Asia is likely to rollover into European markets which are currently tussling with renewed political uncertainty, after German Chancellor Angela Merkel’s failure to form a new government over the weekend. With uncertainty over U.S. tax reforms and political risk in Europe eroding appetite for riskier assets, Wall Street could come under further selling pressure this afternoon.

Central Bankers in the limelight 

We could see some fireworks across markets this week as central bank heavyweights such as European Central Bank President Mario Draghi, Bank of England Governor Carney and Fed Chair Janet Yellen take the spotlight. ECB Draghi will be testifying on the economy and monetary policy before the European Parliament in Brussels on Monday, while Mark Carney is set to testify on inflation and the economic outlook before the Treasury Select Committee on Tuesday. With Janet Yellen also due to participate at a panel discussion in New York this week, investors will be on alert to glean fresh insights into monetary policy if they are on the table.

Euro gripped by political uncertainty

The Euro was vulnerable to heavy losses on Monday after German Chancellor Angela Merkel was unable to form a new government on Sunday night.

With this bombshell development heightening concerns over political instability in Europe’s largest economy and sparking speculation of fresh elections, the Euro may be instore for further punishment. Although Europe’s encouraging macro fundamentals may offer some background support to the Euro long term, political risk has the ability to trigger further selloffs in the shorter term.

Taking a look at the technical picture, the EURUSD remains bearish below 1.1850. A breakdown and solid daily close below 1.1730 may encourage a further decline back towards 1.1680 and 1.1600, respectively.

Sterling steady against Dollar... but for how long?

There is a growing suspicion that Sterling’s abrupt appreciation last week Friday had nothing to do with a change of sentiment towards the currency but rather Dollar weakness.

This could be a volatile trading session for the currency with the Inflation report parliamentary hearing, Autumn Forecast Statement and second reading of the third quarter GDP all in focus. With inflation still hovering around the highest level in over five years at 3%, it will be interesting to hear Carney’s thoughts at the inflation report hearing on Tuesday. In regards to GDP data released later in the week, Sterling could shed more tears if GDP prints below market estimates.

From a technical standpoint, the GBPUSD punched above the 1.3230 level last week, on the back of Dollar weakness. Bulls have a shot at 1.3300 if prices can keep above the 1.3150 level. Alternatively, sustained weakness below 1.3230 may encourage a further decline back towards 1.3150.