Market Preview For The Week Ahead

Conditions within the US and global economies will remain crucial for the currency markets over the forthcoming week.

There are a string of US growth-related data releases, starting with the existing home sales data on Monday. This is followed by consumer confidence and house prices figures on Tuesday and new home sales on Wednesday. Jobless claims are due on Thursday with the Chicago PMI release on Friday. The indicators will be significant, but given the increase in markets fears over recession only a string of positive surprises would have a significant impact on expectations.

Markets will still be uneasy that inflation stresses could lessen the potential for further interest rate cuts. In this context, the US producer prices data on Tuesday and core PCE reading on Friday will also be a significant pointer on inflation trends and whether the Fed will be constrained.

Fed Chairman Bernanke will have the job of reassuring markets and policy-makers in his congressional testimony. Bernanke will deliver his semi-annual testimony to Congress on Wednesday and Thursday. There will also be important comments from Fed officials on Monday and Tuesday. Mishkin and Kohn are two very important members of the FOMC and their comments on Monday and Tuesday respectively will give very important clues on the Fed’s thinking ahead of Bernanke’s testimony. If the Fed wants to influence market expectations, then Miskin and Kohn will start to signal this in their comments.

A tough stance by the Fed would provide some dollar support, although the key impact would probably be a stronger yen against the Euro.

The balance of risk between the US and global economies will also continue to be a crucial markets influence. While fears are concentrated on the US, the dollar will remain vulnerable. If fears intensify more to the Euro-zone and Asia, then the dollar will be well protected.

Euro-zone data will, therefore, need to be watched closely with the German IFO release on Tuesday. The Euro will find it difficult to have as good a week as last week as European market fears are liable to increase.

Conditions within equity and credit markets will continue to be very important over the following week. Last week, there was continuing divergence with equity markets still firm while credit fears increase as the iTraxx crossover index widened to a record high. This divergence explained the lack of conviction over carry trades.

If equity and credit markets move back in tandem then there will be a much clearer trend for carry trades. If the credit markets strengthen then there will be gains for carry trades while renewed downward pressure on stock markets would undermine carry trades. The net risks suggest that uncertain conditions will persist with a lack of conviction still the dominant factor.

Investica

Posted in: Forex