Good day to all.
Welcome to another weekly review of our favorite currency pair, EUR/USD. Remember, to make money in forex, patience and hard work is a must!
In the previous weekly review, i mentioned that investors were concern about the Greek deficit crisis. Firstly, the various parliaments need to vote on the decision to contribute aid. Furthermore, Greece requested for a meeting with officials from the European Union, ECB and IMF and this meeting was speculated to be a confirmation of sorts by Greece and the various parties on further details of the aid package should it be required. An area of concern would be the conditions imposed by IMF for a aid package. As this may be in the form of further cuts and reduction of budget items including pension and compensation of civil servants, more strikes may happen.
FED chairman Bernanke said that the economic recovery of the US will probably be mild due to factors like high unemployment. He reiterated the pledge to keep interest at record low rates for an “extended period.”
Looking at the EUR/USD daily chart, it is clear that the currency pair has slipped to the lower range and tested 1.3200.
The week began with bearish sentiments. The meeting between officials of Greece, the European Commission, ECB and IMF was delayed due to the volcanic ash from Iceland. Investors were anxious about the aid package and a delay sparked speculations of hiccups. The economic fallout from the volcanic ash brought concerns too as the already fragile Euro bears the impact of flight cancellations.
When the German ZEW Economic Sentiment was released , it was better than expected. However the Euro currency did not strengthen. This indicates that the apprehension over the Euro Zone and in particular the Greek deficit crisis remains high and investors hold back on their investment money.
Towards the end of the week, Moody’s downgraded Greece ratings and mentioned that the outlook is negative. This caused a major outflow of investment funds from the Euro Zone. Strikes by civil servants in Greece added oil to the fire. The budget deficit estimate of Greece was was revised upwards from 12.7% to 13.6%.
Sentiment was so bad and critical that the EUR/USD slipped to as low as the 1.32 region. Greece’s borrowing cost became so high that her Prime Minister said it was ” unsustainable.” A bail out was requested.
IMF assured Greece of a fast response. The Greek Finance Minister said that with the promise of aid, it leaves “no doubt” about the debt repayment next month and the country will source for loans from the markets again “when the conditions are appropriate.”
While all this drama unfolded in the Euro Zone, it is interesting to note that the US economy remained rather resilient. Although the S&P 500 went below 1200 at times, it strive hard to go back above 1200. Nonetheless, we must remain vigilant against any adverse developments. After all the unemployment rate remains high and interest rates seem to be remaining low for a long time of time.
We noted that gold has risen considerably. This may be due to increased demand. As gold is usually an investment of choice when the economic outlook is uncertain, we may be seeing investors seeking refugee in the precious metal.
From a technical point of view, the EUR/USD seems to be reacting to the round numbers as per the textbooks. ( 1.3200, 1.3400, 1.3600, etc ) This continues to serve as a reference to us. However do note that support and resistance lines are never a single pip and they are definitely not 100% predictions. The sharp bounce of 1.3200 suggests that the market is not ready for a lower EUR/USD for now. Having said so, forex is unpredictable and hence adverse developments may push the pair down.
The Greek deficit crisis may be one of the focus next week. As the IMF prepares its required conditions for a loan, investors may be worried that it may be further budget trimmings. There are strikes happening because of budget cuts and hence an escalation may hamper the already weak economy of Greece. Furthermore even if the aid package takes care of financing needs for 2010, investors are questioning of the needs of 2011.
Next week brings us important data such as the US federal fund rates and German Unemployment Change. You can find the list of the various economic releases in the Economic Calender below.
Trade safely and remember to plan your trades well.
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