1. FISCAL CLIFF: LIKELY RESOLUTION FAVORS EURUSD
Markets anticipate a last minute deal before yearend that once again defers most of the austerity measures to a later date. If so, it will have a double benefit for the pair.
- It boosts risk appetite in general: good for the EUR, bad for the USD
- It specifically strengthens the pair because of the implied continued weakening of the USD via rising deficits and ongoing forms of money printing
Note that if Washington fails to reach a deal, expect the opposite result:
Severe risk aversion as the largest economy is likely to contract (bad for the EUR)
Significant reduction in the US deficit and USD printing to fund it, boosting (good for the USD)
2. FOMC MEETING: EXPECTED RESULT POSITIVE FOR EURUSD
The Fed is expected to maintain its overall stimulus. Even though operation twist expires, the FOMC is expected to expand QE 3 mortgage bond purchases by a similar amount in order to maintain the current overall stimulus effect of the two separate programs.
If the fiscal cliff deal looks shaky, the Fed may even increase overall asset purchases in order to cushion the blow of any unanticipated austerity.
Either scenario at minimum supports the current level of risk appetite, and continues the ongoing debasement of the USD, to the benefit of the EUR.
3. EUROPEAN COUNCIL MEETING: NEUTRAL/MINOR NEGATIVE FOR THE EURUSD IF IT FEEDS HOPES OF ECB RATE CUTE
Last week ECB President Draghi’s comments suggested a rate cut might be coming for the EUR. On the one hand, that would boost near term risk appetite (good for the euro) but on the other hand it directly weakens the euro. Given that the Fed is already deep into QE 3 while the ECB has yet to start its OMT program, the pair might well not drop much.
Indeed, most expect the Fed to expand QE 3 to compensate for the end of Operation Twist and maintain its dovish stance, so the relative strength of the two currencies might not see any meaningful change.
4. GREECE: ANTICIPATED SUCCESS OF GREEK BOND BUYBACK A MINOR POSITIVE FOR THE PAIR
The buyback once again defers Greece’s default. That supports risk appetite and so is positive for the pair, at least in the near term as it calms market worry about default risk. Because this outcome is largely assumed, the upside is mostly already priced in.
The opposite result would bring a far more dramatic move in the opposite direction, as it would again raise Greek default and contagion risk. As we’ve noted previously in our special report on a brewing market crash scenario here, anything that spikes EU anxiety in the coming weeks risks a new EU crisis.
5. CHINA DATA DUMP THIS WEEK EXPECTED TO SUPPORT RISK APPETITE, EURUSD
Both data and official comments out of China have been positive for markets, and it’s expected that this week’s batch of economic data continues to support risk appetite and thus the EURUSD.
5. ECONOMIC CALENDAR: EXPECTED TO BE NEGATIVE FOR EURUSD
The ongoing contraction in the EU, confirmed by growth outlook cuts for the region from both the German Bundesbank and ECB, is a continued negative for the EUR and a support for the safe haven USD.
7. TECHNICAL PICTURE: TECHNICAL RESISTANCE A NEGATIVE FOR THE PAIR
As we discussed in our review of last week’s market action here, the bellwether S&P 500 index has hit significant 3-phased resistance, which in the near term will limit upside potential in risk assets like the EURUSD until there some significant pro-risk news. A deal that defers most of the austerity measures of the US fiscal cliff would be the single most important piece of news that could fuel a decisive breakout past the index’s current multi-month resistance zone around 1400.
THE BIG LESSON
As we discussed in the conclusion of our weekly preview of global markets (see here), both the EUR and USD are likely to lose value relative to other major currencies. For those living in the US or EU, it’s critical to diversify your exposure beyond these two currencies, as both are at risk of debasement at the hands of their central banks. For the most up to date collection on a variety of practical solutions to fit most risk tolerances, skill levels, and personal time constraints, see here and here.