Clouds Over The European Union

The USD held its ground against the EUR and GBP on Friday and picked up some steam against the JPY. Wall Street finished the week with another round of positive moves. However the strong USD doesn’t necessarily mean that all is wine and roses in terms of economic outlooks. The University of Michigan Consumer Sentiment reading came in weaker than its estimate with a result of 67.5 compared to the anticipated mark of 68.1. Why point this out when so many other risk events are taking place globally? Because what it may show is that consumers in the States are weary of higher energy costs. And the price of Crude Oil is remaining stubborn as it hovers above 105.00 USD a barrel. This price may not be a danger yet, but if the price of Crude were to climb higher it would pose a significant threat to manufacturers.

The strength in the USD did not come from U.S. fundamental data, what it most likely came from are the shadows which have again emerged over the European Union. The Sovereign Debt situation among the ‘smaller’ E.U. countries is being highlighted once more as Portugal nears an economic abyss and decision regarding it future. There are plenty of reports saying the E.U. has the foundations in place for a bailout fund for its struggling nations, but its framework is still far from clear. One of the reasons the EUR has been strong in the past couple of months is because ECB President Trichet has been hectoring about inflation and he has signaled that he is serious about fighting rising prices with an interest rate hike. Skeptics however point out that if the ECB were to raise interest rates that it would effectively kill off any prospects of a recovery in many European nations and perhaps create greater burden on Sovereign Debt concerns. There will no major data from Europe today and investors may turn their attention to the election results in Germany in which the leading political party took it on the chin over the weekend in local elections. Tomorrow German CPI data will be released along with GfK German Consumer Climate reading. The EUR finds itself at an interesting crossroad. Having gained steadily for the past few months it finds itself with a renewed barrage of damning questions regarding its economic outlook. How the ECB and Federal Reserve balance their dilemmas is the fuel that feeds the fire.

Within this mix the GBP has also lost some ground in the past couple of trading days. Making news over the weekend were demonstrations that were held in the U.K. against austerity measures, which are being introduced and being met with chagrin from some segments of the population. There will be little economic data today for the Sterling, but tomorrow Final GDP is on the schedule and will garner attention.

The U.S. will release Pending Home Sales numbers today, this as the housing sector has provided rather gloomy readings the past two weeks. However international news will continue to be a spring for sentiment. Japan is still being watched closely regarding its nuclear radiation crisis, and Libya and the whole of the Middle East continue to roil which makes for rather cautious investors. The price of Crude Oil is being watched closely as the Middle East situation remains murky. While stability has been found at Crude Oil’s current price levels, the question is what would happen if news continues to show deterioration politically among Middle East countries. Gold has slumped in prices this morning and finds itself as of this writing 1415.00 USD an ounce, but the precious metal still has many believers and traders may be tempted to test its ranges.

The JPY has slumped but is still within its known ranges. The weakness in the JPY the past couple of sessions has not gone unnoticed. The Nikkei bourse continues to slump in Japan under pressure from its national crisis. Japan has the attention of many investors and its situation will be monitored closely. The AUD remains in record territory and traders may feel an urge to see if it can sustain its pace. The AUD has been buoyed by good economic data, a strong financial sheet, and commodity prices that are high.