Good day koalas!
We observed yesterday that equities around the world mainly rallied on optimism as the European Union came to an agreement on a crisis aid solution to lend as much as almost 1 trillion dollars to the most affected countries. Furthermore, it was observed that the ECB stated that it would ease severe strains in certain markets by purchasing government and private debt. The central banks of a few countries like the FED and the ECB reactivated currency swap arrangements too to contain the Euro Crisis. However i reminded everyone that the crisis was a tricky one and we probably faced long term effects.
Risk aversion seems to have crept back. The EUR/USD has since fallen back to the levels before the forex gap, giving the ” the forex gap must fill” believers another victory. ( I personally believe that there is no 100% that forex gaps must fill. Read the article on forex gaps to find out more )
Observing the S&P 500, the US economy displays it’s resilience again as the equity index climbs above 1160.
Gold is hovering around $1220 and is now at the levels before the previous crash. This rings alarm bells in me as gold can be an indication of risk aversion. As i mentioned in my recent EUR/USD – Gold correlation report, this may be clue to further risk aversion.
There are growing concerns again on the adequacy of the almost 1 trillion dollars emergency lending fund. As i mentioned previously, sentiments especially negative ones are like cancer. It spreads and is tough to contain. Without a continued show of positive developments, the negative sentiments will be back to haunt the Euro Zone.
Another concern will be with regards to the damage this solution will do to the Euro economy. This concern is not unfounded as previous studies shown that with every bail out comes implications on the economy. This may be in the form of slower growth due to the massive funds used. The Euro Zone is increasingly at risk of a disconnect from the global recovery.
On a positive note, there are speculations that British politicians will form a majority government that will try to reduce Britain’s budget deficit.
Tomorrow’s economic data line up brings us a number of important releases. This includes the German Preliminary GDP and the US Trade Balance.
As of now, we are not seeing any major bullish indication hence be careful with your trades.
Any bullish relief may bring the currency pair to 1.2800/880
Further bearish pressure may see 1.2645/550.
I am hard at work today. Constantly trying to find new ways to reach out to new koalas. My latest invention? LOL the Are you a forex koala quiz on Facebook! Try it here.