The economic uncertainty in the US has led to a see-sawing of market sentiment in recent weeks, bouncing up when positive economic data from the US is revealed and dropping down again when further news is negative.
Federal Reserve Chairman, Ben Bernanke has consistently said he will not consider trimming the economic stimulus which is keeping the US economy buoyant currently, until he sees substantial evidence of an economic recovery. Integral to this economic health is the unemployment rate, which is currently sitting at 7.6%;Bernanke requires it to drop below 7% before he considers trimming the stimulus.
While he initially said he may begin reducing the stimulus as early as September, his comments last week that it may not be trimmed before 2014 shocked the market and have been causing uncertainty in traders ever since. Until Bernanke makes his next proclamation, the market will be closely watching the economic data for indications of economic improvements.
This week there are several different news announcements scheduled for the Eurozone and the US that may influence the market. German and French PMI due on Wednesday is expected to cause volatility in EUR pairs and may also influence GBP. Meanwhile new home sales and unemployment claims in the US will be closely watched in case they come out stronger than forecast.
The UK has seen some indications that the economy is recovering, however the government is being cautious until further evidence of a return to fiscal strength is clear. The latest GDP figures are forecast to strengthen from 0.3 to 0.6 and, if this data is proven, new Bank of England Governor Carney may look to reduce the economic stimulus which is currently boosting the British economy.
The Japanese yen has also benefited from the uncertainty in the market and pared back some of its recent losses to the USD early in the week. On Monday it was trading at 100.61 before dropping to 99.14 early in trading on Tuesday. The pair is trading around 99.92 now and technical indicators showthe USD is overbought, suggesting traders are looking to sell the greenback now. Some further strength from the yen is likely and analysts are even suggesting the USD/JPY may drop as low as 92.
While this indication of yen strength is good news for Bank of Japan Governor Kuroda, as it indicates his stimulus programme is having an impact, he still has significant work to do to shore up the economy so that when the stimulus is reduced the country does not fall back into financial woe. The yen also took an advantage of mixed data from China, rising to 99.35. The yen is considered a safe haven in the Asian market so it is common for disappointing data coming from China to be positively reflected in the yen’s rate.
The AUD/USD continues to be an exciting pair for traders with the Australian dollar strengthening several times last night at 100 pips a time, rewarding those traders that forecast Australian dollar strength. The reason for the boost in the Australian currency was the improved indications of China’s economic growth. This morning’s worse than expected China PMI data also had an impact on the Aussie, pushing it from 0.9316 to 0.9244. There are now questions in the market as to whether the Reserve Bank of Australia will cut interest rates at the next meeting from an already record low of 2.75%. A cut was previously expected, but it no longer seems to be the right time to reduce rates and, instead, the economy may be given time to rebalance.
Gold has been one of the big winners of the past week, benefitting from the uncertainty in the US economy. On Monday it rose from $1,295 an ounce to a high of $1,339 before dropping slightly on Tuesday morning to $1,329. Traders are carefully watching the precious metal and how it may respond to any further announcements or comments from Bernanke. It’s difficult to forecast gold’s rate as its performance is so contingent on Bernanke’s strategy and his recent comments suggest that even he doesn’t know what his timeline is for reducing the stimulus.
Oil has also been an interesting instrument to trade in the last week. The price climbed last week from $104 dollars a barrel on Wednesday 17 July to $108 on Friday 19 July, however it declined back to $106 early this week on news that the two biggest consumers of oil – China and US – had lowered their consumption forecasts.
What to watch this week:
EUR/USD, USD/JPY and GBP/USD are the pairs to watch this week in case of further news from the US that may cause volatility in the market and substantial fluctuations in these pairs.
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This article was first published on 24th July 2013