Market rumors have started to circulate to start the week, with some European newspapers discussing the possibility that new strategies from regional finance ministers will be seen this week. Speculation about the specifics has centered on ECB asset purchases and Federal Reserve loans to the current IMF fund that was established previously. The positive sentiment was also supported by this weekend’s successful vote in Italy to pass austerity measures (valued at 20 billion Euros).
Government officials from the Eurozone member nations will meet this week but this is becoming a fairly common event, so its ability to positively influence markets remains to be seen. Most likely, for the meeting to have any material effect on equity markets we will need to see some sort of confirmation on whether or not the Eurozone as we know it will remain intact, as this is where most of the official rhetoric has focused for the past month. Apparently markets are optimistic (given the rallies that have already been seen this week), so downside risk outweighs upside potential for the moment.
Macro data has started to improve in both the Eurozone and the US, with Friday’s Non Farm Payrolls data was able to match the market’s higher expectations (showing a rise of 120,000 in the headline figure) and the Unemployment rate dropping to its lowest levels since 2009 (coming in at 8.6%). Statistical data will be less closely watched this week as the Eurozone meetings and the monetary policy decisions from the Bank of Canada and the Reserve Bank of Australia will be key for gauging sentiment at the governmental levels.
The consensus is expecting an interest rate cut from for the ECB and RBA but there is some potential for surprise here, so we are likely to see some added volatility during the announcements. Before the meetings, trading conditions could be choppy as positions are squared beforehand and Euro area PMI and Retail Sales data (followed by US services ISM in the New York session) provide market catalysts. The Retail Sales number is likely to get the most attention as increased consumer purchases during the holiday season will be viewed as one of the main indications of economic strength or weakness into the end of this year.
The GBP/USD is reversing its latest uptrend on the hourly charts, with lower highs seen since the beginning of November. Indicators are rolling over from oversold levels, so a test of the hourly downtrend line would not be surprising but this would be an acceptable region to start building short positions. First support comes in at 1.5580 and a break here will accelerate losses. A break of resistance at 1.5720 turns the bias back to neutral.
The DAX is currently pressuring significant resistance levels, with prices slowly grinding through 6130. We have yet to see a daily close above this level, however, so we need to be increasingly aware of potential false upside breaks. Risk to reward ratios favor short positions but it is looking like there will be better opportunities later when momentum indicators are suggestive of new price failures.