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Fundamental Morning Wrap: EUR Silvio worries, Abe & JPY continue and GBP under pressure

With a quiet week ahead we have taken a look at the morning institutional research and note that the focus appears to have fallen on a cluster of themes; Europe has its eyes on the Italian election, the G7 & 20 have had little effect on Japanese attitudes towards monetary policy, and downside pressure is building up against GBP.

EUR/USD

Marc Chandler of Brown Brothers Harriman starts the week by highlighting a situation in Europe that has been grossly overlooked due to the ongoing Spanish and Italian situations, that of France. Namely, he comments that Socialist leader Hollande is in a pickle and he has little option left but to drastically cut public spending or see France torn by the bond markets. Lee Hardman of the Bank of Tokyo Mitsubishi UFJ comments that the week ahead looks quiet for Europe, with only the Italian elections on the horizon as a key event. The Danske Bank team see that the European calendar is especially quiet today, but they will be watching ECB President Draghi´s speech at the European Parliament later for any hints of sentiment inside the Bank and the latest LTRO statement.

Jim Reid of Deutsche Bank reiterates that in terms of Europe, a slow week lies ahead, with Draghi´s speech the main, but probably uneventful event of the day. Geoffrey Yu and Gareth Barry of UBS feel that with two periphery elections and several testimonies from Draghi due this week, it is not surprising that investors have stepped back. However, they note that there are still short-term catalysts for upside, such as falling excess liquidity driving up front-end rates, and the perception that the ECB will ‘lose’ any impending currency war. Kit Juckes of Societe Generale feels that we may see a slight EUR relief rally, should Berlusconi fail to surprise with an election victory.



USD/JPY

Lee Hardman of the Bank of Tokyo Mitsubishi UFJ notes that Japan escaped a telling off in the official G20 statement, and overnight comments by PM Abe suggest that even if there were, he would not care. Danske analysts note that following a slight dampening in USD/JPY during the G20, spot is now back up at 94 with the Nikkei closing at 2%. They see the pending appointment of the next BoJ Governor as the key risk event which should provide some volatility. Jim Reid of Deutsche Bank continues the theme by noting that USD/JPY is again making strong gains after PM Abe spoke to highlight the policy option of buying foreign bonds and that BoJ still could potentially be rewritten.

ING Economist, Rob Carnell comments that despite the unified front of the G7 and G20, cracks are starting to appear between the US and Japan in terms of tolerance of policy implementation. Geoffrey Yu and Gareth Barry of UBS note that this week will see an Obama/Abe summit which they feel is unlikely to provide any fireworks, and that many investors have started buying USD/SGD and USD/KRW as a way to play further JPY depreciation, and its consequent impact on regional competitor economies.

GBP/USD

Lee Hardman of the Bank of Tokyo Mitsubishi UFJ notes that in the UK , the release of the latest BoE minutes should offer insight into any potential divisions in the MPC. he feels that there is a risk that the policy shift has served to further undermine near term sentiment towards the pound, with latest IMM figures showing net shorts at their highest since June 12. Kit Juckes of Societe Generale feels that another monthly fall in UK unemployment is expected and will confound economists up and down the land and, “the divergence between GDP and employment is challenging to say the least.”

Forex Flash: ECB rate cut to be fatal for the EUR/USD - Commerzbank

Commerzbank analyst Ulrich Leuchtmann points out that IMF Lagarde's statement (about existence of room for another ECB rate cut) at the G20 meeting was overlooked. "After all it has not reached zero yet", he wrote, questioning why would she be interested in the ECB key rate? "Perhaps I am getting paranoid following three years of ECB crisis management and see signs for an ECB rate cut in anything. Certainly Largarde’s comments were not suited to reassure me", he added.
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After the sharp rally seen after the EMU current account data, though not moved in reaction to its figures, the EUR/USD was capped at 1.3379 high and returned to its opening price area, around 1.3350. An empty calendar and the US out of the picture today, leave investors with no particular interest for what's coming. However, low volumes could allow wider moves in the FX market.
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