The Perplexing EUR

The EUR continued its momentum on Friday against the USD and has begun to leave some traders scratching their heads in wonder. Gold and the AUD also have continued their respective gains as both are within record territories. The JPY has gained in early trading this morning and has come off of the weakest parts of its range versus the Greenback. Crude Oil inched higher on Friday and its price will certainly begin to make manufacturers nervous if it continues to climb. There was little in the way of major economic data released on Friday except for U.K. CPI numbers, which continued to show that inflation is coming from the rise in the commodity markets.

Today will be another rather quiet day for publications and the crux of sentiment will be driven by short term speculation and long term outlooks fueled by a whirlwind of perspectives on Central Banks, financial institutions, and physical resources. The EUR has maintained a steady pace even as many doubts surround it and can be described as core problems. The Portugal government is trying to pass austerity measures, but running into domestic political opposition, this in order to receive the European emergency funding. Greece has let it be known recently that they are finding it difficult to operate under their imposed austerity mandates, which has left a number of investors believing that they might be tempted to restructure their debt. Yields on Spanish bonds will have to be watched carefully over the next few months as these stories continue to develop. The long term key to the story will be the exposure that European banks, particularly German institutions, have within the European Sovereign Debt scenario. While the interest rate hike by the ECB last week was well received, it will certainly take more than a hawkish viewpoint on inflation to take care of structural problems that face many E.U. countries.

The GBP maintained its quality stance against the USD on Friday, but did not sustain the gains that the EUR accomplished against the Greenback. This may have to do with the fact that the Bank of England is now within the same camp as the Federal Reserve it would appear when it comes to the belief – read hope – that inflation is transitory and will diminish as the calendar year progresses. The U.K’s CPI reports from Friday may raise some eyebrows. The GBP has done well in terms of gaining value the past few months as it has moved in a EUR centric mode. A question for the Sterling is the possibility of divergence emerging as philosophical differences become stronger between the BoE and ECB. The U.K. like its E.U counterpart continues to suffer from lackluster to nil growth.

The USD has remained on its weaker footing and many investors are pointing to the quantitative easing policy that the Federal Reserve has maintained. However quantitative easing is due to stop in June and if last week’s battle in Congress over the Federal Budget proved anything, there will be a strong political bent against further ‘spending’ sprees. The U.S. will be quiet with data today and tomorrow only the Trade Balance figures will be published. On Wednesday the Retail Sales numbers will be brought forth, which could prove interesting to investors who continue to languish within rather fragile sensitivities. Wall Street finished last week on a cautious note and it will be of interest to see if equities will begin to gain again now that Congress has concluded their ‘budget dance’. The USD has a complex range of notions surrounding it and its weakness the past few months has some contrarian investors beginning to look its way.

Volatility within the currency markets was evident last week and traders may find that there are opportunities to take advantage of momentum if trends continue. However, with many time honored ranges being tested, traders will also have to be aware that it is a clear sign that the Forex market is reacting to nervous investors and institutions. Gold remains an interesting barometer and should be watched carefully.

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