Trichet and Bernanke Set To Speak Thursday Morning
Thu, Sep 2, 12:11 PM ET, by ForexTraders.com
Two of the most powerful people in the world will speak Thursday morning concerning the global economic outlook. The EUR/USD has moved up slightly during the London session on the heels of positive bond auctions in Spain and France; however, the market was unable to bid prices up beyond yesterday's HI's at 1.2855 as investors wait for European Central Bank President Jean-Claude Trichet to speak at 8:30 am and Fed Chairman Ben Bernanke at 9:00 am.
Although today is heavy with key risk events, the market may not break out of its trading range until the Non-Farm Payroll release tomorrow morning. NFP tends to be one of the most revered key leading indicators of economic health, and the market may be hesitant to commit to large directional positions before the NFP confirms economic direction.
TrichetAs stated, the euro found strong support this morning as a result of strong bond auctions in France and Spain. Strong bond auctions are expected in France, but the market is still watching Spain, Portugal, Greece, Italy, and Ireland very closely. For several months now, we have been writing about the possibility of the EuroZone Debt Crisis re-emerging this fall. One of the leading indicators that will show the EuroZone is again in serious trouble will be when and if these struggling countries face difficult bond auctions. As of yet, there is still plenty of investor demand for these bonds, but if the fiscal concerns do become serious enough that investors are unwilling to buy Greece, Portugal, Spain, Ireland, or Italy's bonds, then there will most likely be a huge bout of risk aversion that sweeps the market once again.
European equity markets remained subdued even in light of the positive bond auctions as investors were unwilling to bid prices up before Trichet speaks this morning. The market will be watching and listening closely to see whether Trichet formally commits to extending liquidity to help the European banking system. GDP blew past market expectations in the 2nd quarter. The expected figure was 0.7%, and the actual figure came out at 1.0%, which was quite surprising considering the systemic problems the EuroZone faced during the Q2 with its Debt Crisis. However, Germany was able to benefit enormously from a cheap euro as its exports were much more attractive to foreign buyers, and that increased exporting activity in Germany helped overall EuroZone GDP tremendously. Now, many economists are concerned that economic growth will slow significantly in Q3 as the euro has strengthened during the last 3 months.
Trichet is also expected to cast a cautious tone concerning economic outlook, but traders will be listening closely for any new verbiage or departure from his normal mood of cautious optimism. Trichet has also been championing fiscal austerity in developed nations, saying that countries such as the U.S. should turn to decreasing government spending. Interestingly enough, Fed Chairman Ben Bernanke is actually about to the do the exact opposite as he and the rest of his Board Members at the Fed are currently preparing to inject another round of fiscal stimulus into the U.S. economy. BernankeToday, Fed Chairman Ben Bernanke will be testifying before the Financial Crisis Enquiry Commission in Washington DC. Bernanke's testimony comes in 2 parts: a written, prepared statement and an open Q&A session with the Congressional board. The prepared statement does not generally move the market as most of his verbiage will most likely be as expected, but during the Q&A, his answers to tough questions oftentimes offer a clearer picture to investors concerning the Federal Reserve's next steps.
The most likely scenario in the United States is that the economy will enter into a prolonged period of very sluggish growth. Mr. Bernanke has been communicating this view consistently, but he is concerned that the very sluggish growth could pull the U.S. into a deflationary period, which can be disastrous for an economy and can lead to a decade or more of virtually no economic growth. This fear is why Mr. Bernanke and the Federal Reserve are seriously considering yet another round of quantitative easing. They are willing to do anything to stimulate the economy back into robust growth. Market Price ActionYesterday, we mentioned the euro was beginning to put pressure on resistance to the upside. We currently have some very fascinating price action beginning to develop between the euro, pound, and dollar. Generally, the EUR/USD and GBP/USD move in very tight correlation. However, we have been seeing that correlation break down over the last few days. This morning, U.K. Nationwide HPI came out below the market expectation of -0.3% at -0.9%. This surprise to the downside led the pound to move lower in the immediate aftermath of the release and then to drift sideways and lower throughout the London session.
On the other hand, the euro has again moved to the upside during the London session today. The economic outlook and Central Bank leaders in the U.S, U.K. and EuroZone are diverging. In the EuroZone, Trichet is by far the most hawkish concerning interest rates and monetary conditions, and the EuroZone is also posting pretty good economic data relative to these other countries. Therefore, the euro is beginning to move higher, and if economic data continues to back up Trichet's decisions, we could see the euro move up quite a bit versus both the dollar and pound in the coming weeks.
Of course, the elephant in the room concerning the EuroZone is the possibility that any day the EuroZone Debt Crisis could begin to erupt again, but currently those fears seem to be on the backburner. If the sovereign default concerns in the EuroZone can remain contained, then the euro could move up quite nicely in the next few months.
We have been calling for a huge drop in the euro at some point in the latter part of 2010, but the reality is that will most likely not happen as long as the Debt Crisis remains under control. As a trader, be on the lookout for the first signs of major fiscal trouble in struggling EuroZone countries.
SDI Glossary: "Debt" Definition
SDI Glossary: "price" Definition
SDI Glossary: "the Fed" Definition
SDI Glossary: "GDP" Definition
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