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Free highlight - February 2nd 2012

Dollar support in the short term is still likely to be curbed by the dovish Federal Reserve stance. There will be fresh doubts surrounding the growth outlook, especially in Asia and this will have an important impact in curbing selling pressure. It will still be difficult for the US currency to gain strong support unless global fears intensify rapidly.  The degree of yen and Swiss franc buying will need to be watched closely as any surge in demand would indicate that financial-sector de-leveraging is still having a powerful impact.

The ECB will have to maintain an extremely expansionary policy to keep the European banking sector afloat which will maintain fears surrounding quantitative easing.

Greek default fears will continue in the market. This will have a contradictory impact with fears over structural vulnerability and the risk of a Euro break-up offset by the possibility that a new hard Euro area will be formed which would tend to gain ground.

Monetary policies are liable to dominate and this should give the Euro a net weaker bias over the next few weeks, but an aggressive shorting policy is still dangerous given the positioning bias. 

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Sample copy

Daily market analysis 8th December 2011 

Forecast trading ranges and main-market strategies

Currency

Spot

Forecast range for the next 24 hours

Forecast range for the next 8 weeks

Short-term strategies (24-48 hours)

Medium-term and hedging strategies (72 hours +)

EUR/US$

 1.3415

 1.3260 - 1.3490

 1.2750 - 1.4050

 Look to sell near 1.3500

 Look to sell near 1.3900

US$/JPY

 77.60

 77.50 - 78.20

 75.50 - 87.50

 Look to buy near 77.50

 Look to buy below 76.50

EUR/JPY

 104.10

 102.90 - 104.70

 98.50 - 112.50

 Look to buy near 100.00

GBP/US$

 1.5715

 1.5550 - 1.5750

 1.5050 - 1.6150

 Look to sell above 1.5700

 Look to sell near 1.6000

EUR/GBP

 0.8535

 0.8500 - 0.8570

 0.8300 - 0.8950

 Look to sell near 0.8600

 Look to sell near 0.9000

US$/CHF

 0.9235

 0.9180 - 0.9320

 0.8690 - 1.0050

 Look to sell near 0.9300

 Look to buy below 0.8800

AUD/US$

 1.0280

 1.0125 - 1.0310

 0.8950 - 1.0550

 Look to sell near 1.0300

 Look to sell above 1.0400

US$/CAD

 1.0095

 1.0060 - 1.0170

 0.9950 - 1.0800

 Look to buy near 1.0050

 Look to buy below 1.0000

Bold figures indicate changed levels

Strategy summary

There are certainly a very important 36 hours ahead for the Euro-zone, Euro and currency markets as a whole.  Markets are poised to break out of very narrow ranges and a high degree of caution is required over the remainder of this week and over the weekend given that the EU Summit may well conclude after markets have closed.

The downplaying of expectations surrounding the Summit could certainly be a ploy by the German government as any kind of deal will then be received much more favourably.

These are dangerous games to play, however, and the net risk is that disappointment will set in quickly.  The ECB will offer something on Thursday, but will have to be cautious as more aggressive action will have to follow any political deal. In this environment, the Euro is unlikely to make much headway and selling rallies still looks like the best approach, especially with strong pressure on the ECB to deliver more support.

 

Short-term strategy highlights

Narrow ranges will tend to prevail initially, but there will be a growing breakout threat surrounding Friday's Summit. Cautiously look to sell EUR/USD in the 1.35 area.    

Medium-term strategy highlights

There will be the threat of increased fear surrounding the UK outlook, especially if defensive inflows start to fade. Look to sell GBP/USD on any move towards the 1.60 area. 

Other market strategies

Look to sell AUD/USD on any move to the 1.04 area given the threat of complacency over the Asian economic outlook.

Valuation strategies

Medium term, on valuation grounds, look to sell EUR/USD on any move to the 1.38-1.40 area given the dollar under-valuation.

Black Swan risks

There is still the risk of a major banking collapse within Europe which would undermine risk conditions very seriously   

Economic data opportunities over the next 24 hours

The US economic data will find it hard to make much impression given that European actions will dominate. A lower than expected jobless claims data figure would provide some support to risk appetite

Time (GMT)

Data release/event

Previous

Market Expects

Analysis

Strategy
 12.00 Bank of England interest rate decision  0.50%  0.50% There is a small chance of further bond purchases, but a steady policy is more likely as the bank is in wait and see mode Look to sell GBP/USD on any relief rally following a decision to hold policy steady
 12.45 ECB interest rate decision 1.25% 1.00% This is a tough decision for the ECB and there is certainly scope for a surprise although a 0.25% cut and a bigger discount rate reduction looks the most likely There looks to be little risk in running a short Euro position into the decision given the possibility of more aggressive action
 13.30 ECB press conference     This is another extremely important set-piece event for Draghi as he will be criticised if he delivers too much or too little Overall, look to sell EUR/USD rallies during the conference as the Euro is not likely to gain sustained support

Key factors to watch

There will be a high degree of tension surrounding formal EU Summit on Friday with an informal Dinner planned for Thursday

The Euro-zone sovereign credit ratings will continue to be watched closely

Euro-zone bond yields will remain a key focus and a renewed increase in yields would undermine Euro-zone confidence.

Trends in Libor rates will still need to be watched and any further widening would maintain fears surrounding the banking sector.

Comments from the Swiss National Bank and Bank of Japan will remain an important focus

Market highlights

The Euro was again trapped in narrow ranges on Wednesday as caution prevailed ahead of Friday's EU Summit. Although markets still wanted to take a slightly more optimistic tone towards risk, doubts continued, especially after downbeat German comments and this curbed strong buying support

Market analysis and previews

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