The Euro is posting a strong reversal from the Friday close (when we saw strong rallies in equities as well) but the activity is getting little attention as many seem to be suggesting that the carnage could have (or should have) been much worse. Last week’s EU Summit meeting produced little in the way of meaningful budget strategy but the next event risk will give some indication of the markets true feelings about the state of the Eurozone.
This event will come with this week’s treasury bond auctions, so currency markets will be particularly watchful of any rallies in bond yields, as this will almost certainly bring heavy selling pressure back into the EUR/USD and in European equity markets. The reverse could also be true, however, as a stable bond auction would likely lead to some short-covering in the Euro and send prices back into the upper 1.34 region.
Overnight, the main macro releases came from China and Australia, where Trade Balance figures were released. Both reports were in line with expectations but showed weaker export growth on decreased demand from western economies. Looking ahead, traders will be watchful of central bank meetings in Norway, Switzerland and the US. Markets are not expecting a substantive change in policy from the Federal Reserve, so most of the attention will go to the policy statement, as markets look for the central bank’s opinion about the current debt environment and year end consumer growth.
The most market moving of these could be the SNB meeting, where a change in interest rates is expected, along with a possible raise in the price floor of EUR/CHF to 1.25 (from the current 1.20). The raise in the price floor is not a given, but given the decreases in consumer inflation that are currently being seen, the SNB might use this meeting as an opportunity to weaken the CHF back toward its target levels.
So far, the main data this week has been the Australian Trade Balance, which was posted at 1.6 billion AUD (down from 2.25 billion in September). The main reason for this was an increase in imports and weaker prices in the country’s iron ore exports. The Chinese trade data showed a drop to 28.7% on a yearly basis, which is indicative of the effects that the global growth slowdown is having on emerging markets.
The EUR/USD rally is running out of stream and starting to show a significant reversal from the rally that marked the end of the week on Friday. Prices are currently approaching significant short term support in the 1.3280 region, and a break here would essentially remove any bullish argument for the pair. The next level to watch ahead of the yearly lows comes in at 1.3210 but indicators are not firmly in negative territory, so a downside break looks imminent.
The S&P 500 showed a strong rally last week, with prices now rolling over and finding support at the 38.2% Fibonacci retracement at 1250. This is also a key psychological level, so a break here will likely send prices into the low 1200s before seeing any meaningful bounce. Resistance has moved down to 1260 on the short term charts. A break here accelerates gains.