Volatility Going Into The Weekend

Upon the interest rate hike from the ECB on Thursday the broad markets reacted with calm. However, after ECB President Trichet’s press conference things began to get interested and have built on the energy since then. The EUR has run up higher against the USD, Gold has broken through to new highs, and the AUD is also in record territory as of this morning. The USD has languished as speculative forces have taken the EUR and GBP on an upwards climb upon President Trichet’s response that the ECB will continue to monitor inflation as it has done in the past. While Trichet made no promises of additional rate increases, some investors have obviously taken the position that the ECB will remain hawkish towards any inflationary threats. The move by the EUR comes on the heels of Portugal admitting that they are no longer capable of handling their own financial problems alone.

The billion dollar question is if Portugal is the last of the E.U. nations that will seek an emergency package or if other problems will mount down the road. Optimists believe that there will no more nations that will need a bailout – now that Greece, Ireland, and Portugal have succumbed to the weight of their debt portfolios. However, cynics are now looking to Spain and will eye the yields from the Spanish bond markets. What investors will have to also look out for is talk about restructuring of debt from nations – which is a much more polite word than defaulting – as they contemplate ways in which they can repay their obligations without going bankrupt. The ECB has managed to carry through the debt storm seemingly with a magic pill – meaning a strong dose of anti-inflation rhetoric and an interest rate hike.

There will be little in the way of major international economic data today, which will put the onus of sentiment on what has taken place the past few days and the outlook for the future. With President Trichet’s words that that the ECB will remain faithful to its mandate – which means looking over price stability – investors find themselves with a perplexing gauntlet of questions. Many analysts continue to point out that raising interest rates as nations are faced with lackluster growth is not a cure for ills. And on this note, President Trichet iterated that the action on Thursday was not the first in a series of interest rate hikes. Thus the question is what will happen next, and what investors will likely be asking is where commodity prices are going. The Commodity markets remain firm with Gold breaking into record highs, as of this morning’s writing to 1465.00 USD an ounce. Silver is at highs and Crude Oil is trading above 111.00 USD per barrel via the West Texas Intermediate grade in New York. Grain prices continue to push upwards on crop issues, speculation, and shifting demand.

The Bank of England made no change to their monetary policy yesterday and from the States the weekly Unemployment Claims figures nearly matched expectations. Wall Street turned in a negative performance yesterday, but this may have to do with a combination of profit taking and the threat of a government shutdown in the U.S. if Congress fails to come to a budget agreement today. One point that should be noted is that even though Wall Street managed to turn in good gains the past couple of weeks that a lot of this came on low volume which underscores that a wide range of investors remain cautious.

The Forex markets have seen plenty of volatility the past few days as the EUR has performed strong and the AUD has marched in step with record Gold prices. The volatility is likely not over as investors still have plenty of reasons to reconsider their positions. Traders must remember that there is a huge difference between short term sentiment and long term outlooks. The EUR has done well the past week and the question surrounding its sustainability is an interesting one.

Going into the weekend there are large swatches of opportunities to look at. The JPY is in an interesting consolidated position, the EUR and GBP are touching highs in their ranges, the AUD has many backers, and Gold and Crude Oil remain under the bright lights. Traders will have to weigh their risk appetite carefully.

Written by bforex.com