Forex Investment and Currency Trading

The euro remains under pressure after Wednesday’s attempt to rebound was quickly reversed. The latest German data (weak reading of the factor orders data with a -2.3% m/m print for November) is added to the negative outlook. Also the German government has suggested that it is assuming the ECB will keep interest rates at the record low of 1% through to 2013 (market expects a cautious approach from the ECB at today’s meeting). Market now expects EURUSD to test the major medium term support in the 1.3730/10 area.

The broader picture for the euro also remains bearish with the EC endorsement of the Greek fiscal plan yesterday allowing the market to turn its attention to the other countries at the periphery of Europe, particularly Spain and Portugal. Indeed, it is interesting to note that the rating agencies have had to deny market rumours that Spain’s rating is set for a downgrade. This highlights how the issue of fiscal problems in EMU is spreading and will continue to provide a negative backdrop for the euro. Renewed pressure on spreads in EMU will keep EURUSD under pressure and the prospect of a break to new lows has increased. At the time of writing the BoE announcement is awaited. The BoE is expected to announce a pause in its asset purchase programme (although leaving the door wide open for further action if required) given the recent data strength and the spike of UK inflation. However, the spike of inflation is temporary and the BoE will go to great lengths to reassure the market that this is the case. It is also believed that the strength seen in UK leading indicators is the result of over optimism which is set to be disappointed. Indeed, media reports suggest that the January activity data is set to come in weak as a result of the bad weather, with the retail sector also hit by the VAT increase. While the immediate market reaction to the pause in QE is likely to be an attempted sterling rebound analysts expect this positive reaction to be short lived and it is viewed a GBPUSD recovery as providing a medium term selling opportunity.

The encouraging labour market surveys from the US (ADP and the employment components of the ISM reports) are likely to raise the expectations for a strong non-farm payroll report on Friday. A positive NFP report could add to the USD recovery momentum if the market starts to bring forward its rate hike expectations and especially if asset markets start to come under pressure. Sentiment continues to turn against the AUD. The mix of a less hawkish RBA and Chinese tightening are set to take their toll on the AUD. Also note the extremely disappointing Australian retail sales data, which will add to the AUD’s developing problems. Political pressure in the US to name China as a currency manipulator is also growing once again, although analysts do not expect China to take action on its currency until the second half of the year (and international pressure may prove counter productive).