May 9th 2011: Weekly Market Preview - Reality check to provide further dollar respite
Its possibly a dangerous statement to make, but trends for the week ahead will probably not be determined principally by economic data releases as the markets are liable to be focussed elsewhere. There looks to be scope for an immediate relief rally for the Euro, but selling EUR/USD on rallies and further high volatility are liable to be key features over the week ahead.
Of immediate importance will be the situation surrounding Greece following a weekend of rumours and speculation after rumours late on Friday that Greece was set to withdraw from the Euro. There appears to have been a significant shift over the weekend with senior officials such as Euro-group head Juncker stating that there did need to be a fresh economic plan.
Well – it’s a step in the right direction as it has been clear for weeks if not months that the Greek situation was unsustainable. Without the option of devaluation, there was no possible escape route for Greece which did not eventually involve debt default of rescheduling. The Euro line of denial was increasingly untenable as Greek debt yields continued to spiral out of control. Its positive that they have admitted this, but they still need to find a workable solution that doesn’t spark a European banking crisis.
The task for Euro leaders now will be to form a credible plan ahead of the planned Eurogroup meeting on May 16th. The Euro may gain some immediate relief if Greece is still in the Euro on Monday morning, but there will still be an increased risk premium surrounding the currency with the ECB also struggling to justify a further near-term interest rate hike.
You get the impression that Euro officials have been very reluctant to talk down the Euro because they knew that the structural situation was going to get worse which would push the currency down anyway.
Elsewhere, commodities will remain an important focus following the extreme volatility seen last week. If there is another round of panic, forced margin selling and closing of long speculative positions, then there will be further buying support for the US dollar with commodity currencies under fresh selling pressure. With the Fed remaining accommodative, the initial selling phase may have come to a close, but there will certainly be greater caution over selling the dollar recklessly.
There are no major UK economic data releases due, but the Bank of England inflation report will still be very important for Sterling. The central bank will have seen the latest quarterly report ahead of last week’s interest rate decision, so the general theme is likely to be of a further short-term rise in inflation and general pessimism over the growth outlook. This combination is unlikely to provide much in the way of Sterling support. Heavy Sterling selling should be avoided, especially as the principal feature of the report is likely to be a very high degree of uncertainty over the growth and inflation outlook.
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