FX Market Overview

Sterling traders are like kids outside a neighbour’s door trying to decide who should ask for their ball back. ‘You go first’ ‘No you ask’. ‘No I’m shy; you ask’. Neither is quite brave enough to take the step just as no trader appears quite brave enough to take the Pound through several significant resistance levels and onto the next. €1.20 is the obvious target for the pound but we start this week at the nervy end of €1.19 without the gumption to press ahead. The fact that e haven’t seen a break above €1.20 starts to look like a reason for traders to take profit and allow the Pound to settle back a bit before the year end.
Traders are right to be nervous. The tricky bit is knowing what to be most nervous about. The Eurozone remains the centre of all nervous activity although the news overnight that North Korea’s leader has died has caused some concern in the Far East where military risk statuses will be raised accordingly. That threat level raised the demand for safe havens and we will probably see some of that in the day ahead. However, there is already a demand for safer assets as credit ratings agencies downgrade the forecasts for the Eurozone nations and threaten to drop their credit ratings as well. This is all unnecessary according to the Eurozone leaders themselves but no matter how much they try to deflect attention, the agencies are not looking at Britain in the same light; nice try Monsieur Noyer.
Last week brought mixed data from around the world which largely fell into three categories. China is slowing but no one is sure whether their economy will slow further, have a soft landing and recover or crash. As a country they are probably too wealthy t crash so the other two scenarios are most likely. America’s economy is showing increasing signs of emerging from the gloom of the last three years but there are lagging sectors and there are still concerns that a collapse in Europe could drag America down with it. As for the European story; well more has been said a written about that than anything and rightly so. There is a very real chance that some or all of the Eurozone countries will be preparing for the use of a different currency by this time next year. The turmoil that will create is unquantifiable as I write. No one has ever left the shared currency before so the repercussions are all theoretical at this stage. Volatility is assured in 2012 whatever the outcome.
As for this week, further attempts will be made to secure an action plan for Europe. Surely the Eurozone leaders can’t be surprised at the scepticism of the ratings agencies after more than a year of prevarication and procrastination and the fact that we still don’t know what can or will be agreed. The data diary has a few potential banana skins within it. UK and US economic growth data for the 3rd quarter will be finalised and whilst we all think the numbers will remain as per the previous estimates, no one knows until the ink is dry on the announcement. We also have the release of the minutes from the last Bank of England interest rate setting meeting. The BOE never speaks about its decisions on the day they are made unless they change something so this is the first chance we have to assess their mood. We will also get the UK public sector debt figures and the week ends with a slew of US data including personal income and expenditure as well as durable goods orders. All have the potential to move exchange rates and they probably all will.
Away from all of this, proof that there is no honour amongst thieves. While a couple in Utah were in a shop shoplifting, their pick-up truck, parked outside was robbed of goods worth more than the couple were stealing inside. At last we have proof too that crime doesn’t pay. That’s a good Christmas message.