FOREX: US Dollar Set to Rebound as Euro FinMin Summit Fizzles | Learn Forex | GoLearnForex.com

FOREX: US Dollar Set to Rebound as Euro FinMin Summit Fizzles

Written by article default Wednesday, 30 November 2011 07:43

Talking Points

• Day One of Eurozone FinMin Summit Proves to be a Non-Event
• Euro May Fall on German Unemployment, Euro Zone CPI Data
• US Dollar to Rise on Risk Aversion as S&P 500 Futures Decline

The major currencies were little changed against the US Dollar in overnight trade, with markets digesting news flow from the first day of the Eurozone finance ministers’ summit taking place in Brussels. As we discussed in our fundamental trends monitor, the focus on the Euro area’s debt crisis as the singular driver of sentiment across financial markets over recent weeks makes the sit-down’s outcome the central driver of price action over the near term. So far, the results have been underwhelming.

In large part, policymakers have focused on the mechanics of implementing October’s three-pronged “comprehensive” scheme to contain the debt crisis. Plans to leverage as much as €250 billion from the EFSF bailout fund to buy Eurozone countries’ bonds and guarantee as much as 30 percent of private investors’ purchases of similar securities will turn operational in early 2012. However, the fund will probably fall short of the €1 trillion in post-leverage firepower that was originally envisioned, it will have to turn to the International Monetary Fund (IMF) for assistance. The disbursement of the latest tranche of Greek aid was also approved.

On balance, this offers investors hopeful that the summit will finally produce meaningful progress toward materially addressing mounting sovereign risk threats next to nothing new. Broadly speaking, markets are looking for at least one of two possible outcomes: a fast-track approach toward shared responsibility and deeper fiscal integration that allows debt-laden countries to import the good reputation of prudent Eurozone countries (i.e. so-called “Eurobonds”); or the green light for the European Central Bank (ECB) to aggressively buy high-stress member states’ bonds, insulating them from the prohibitive costs of market funding and securing time to implement reforms. The first of these would likely take a long time to implement, pointing the way toward the latter as the best near-term option.

Given their history with debt monetization in the 1920s, Germany has been extremely reluctant to sign off on a large-scale ECB asset purchase program, but as we’ve argued before this position can be reversed if the scheme is sold as a bulwark against deflation amid slowing growth rather than a bailout. Sizing up the calendar, this puts the spotlight on German Unemployment and Euro Zone Consumer Price Index figures over the coming hours. The former is set to show the ranks of the jobless shrank by 5,000 in November while the unemployment rate holds at 7 percent – a hair above the record-low 6.9 percent recorded in September. Meanwhile, the latter is expected to keep the annual inflation rate at 3 percent, a good deal higher than the ECB’s target 2 percent level.

Taken together, these outcomes suggest Germany is unlikely to be convinced of the urgency of a larger ECB bond-buying program on deflation grounds in the near term, suggesting the figures are likely to prove negative for the Euro and risk-linked currencies against the greenback. S&P 500 stock index futures are down heavily ahead in late Asian trade, reinforcing the case for forthcoming risk aversion. Needless to say, traders will continue to monitor comments emerging from the second day of the Eurozone finance ministers’ summit, with anything that materially deviates from the October framework likely to jump to the forefront as the driver of price action.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

Complete Table of Support and Resistance Levels – www.dailyfx.com/technical_analysis/pivot_points/

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com