Sentiment Will Be Tested

USD

Friday’s trading proved a day of stability for the USD against the EUR as it held onto its gains for the week in face of cautious markets. The U.S. released a better than expected Consumer Sentiment reading via the University of Michigan and their Preliminary report. The mark of 74.2 beat the expectation of 72.4. However it must be mentioned that this number probably had very little effect on investor sentiment. The U.S. Treasury markets continued to experience a sell off and Wall Street turned in slight gains closing out a positive, but albeit lackluster week. This will be the last full week of full volume trading across the boards as investors start to disappear for the ensuing holiday season and because of that traders will have to keep a rather cynical approach to short term momentum.

It will be a very quiet day of economic data from the U.S. and attention will continue to be focused on the tea leafs that the Federal Reserve presents and any rumbling from Washington D.C. regarding taxes. The recent election in the U.S. has provided investors with a certain degree of gridlock and has left politicians without the ability to fast track resolutions. Tomorrow the Federal Reserve will officially get into the picture with their FOMC Statement. The questions surrounding their pronouncements will certainly fall on economic prospects and quantitative easing policies. The Retail Sales numbers will also be forthcoming and this could provide a spark or two for traders. The USD has seen fairly stable trading the past week, but that doesn’t mean that volatility has disappeared completely. There are too many outstanding issues which still are cumbersome for investors to contemplate including growth, budgets, unemployment, and the financial crisis that remains unresolved in Europe. The USD has shown some strength and is at the stronger side of a short term range going into today’s session.

EUR

The EUR continues to be perplexed by the overhang from questions regarding the overall health of the E.U. and their ability to create a comprehensive plan to battle the debt issues which have not gone away. The EUR has struggled for nearly two months since the newest round of concerns emerged. The problem is that European officials appear to be having an open disagreement on how to move forward and create a ‘safety net’ for its struggling nations perceived to be under strain. There will be little in the way of economic data from Europe today, but tomorrow the German ZEW Economic Sentiment reading marks will be presented. However, the EUR continues to trade under the haze of short term sentiment generating around the debt issue. The EUR has been able to trade in a fairly well defined range even with the financial shadow in large measure because the Federal Reserve in the U.S. continues to ‘weaken’ the USD with its policies. Traders will also have to be cognizant that volumes will start to change because of the oncoming holiday beginning next week – meaning sentiment will remain important but sudden volatility could erupt due to an unbalanced trading arena.

GBP

The Sterling has turned in a rather range bound performance the past month. While the GBP is trading at the weaker side of its range it is still hanging onto its overall value better than the EUR. Economic questions remain tough in the U.K. and doubts about growth and austerity have not gone away. The transparency that the U.K. has regarding its monetary policy however compared to the E.U. may help to serve its stability. Inflation data will come from the U.K. today and tomorrow and this will remain a thorn in the side of the Bank of England, which knows full well that inflation in certain sectors are causing pain for British consumers. The GBP has had an interesting path the last two months and opportunities are still abundant for a test of its ranges.

JPY & AUD

The JPY lost more ground to the USD in late trading on Friday and early this morning as Asian markets opened. The Japanese currency finds itself on the weaker side of its range versus the greenback in relative terms and it will be worth watching this week to see if the JPY actually can give more ground back. Having said that, risk adverse traders have certainly not gone away and the JPY could easily pull back to its stronger values in a moment’s notice.  Gold has been range bound the past week and not able to escape a fairly firm grip. But like the JPY, the precious metal could move away from its consolidated pattern quickly if sentiment should see a sudden shift. The AUD has mirrored the movement of the gold and has been range bound the past week.