The downtrend in the Euro is building in momentum as the safe haven US Dollar gains alongside the “anti-carry trade” currency in a clear expression of negative market sentiment. The best indication of this comes from the fact that both stock markets and high yielding currencies are being sold-off at the same time and this is set to continue until we can get some clear evidence that “sky is not falling.” There is some potential for markets to stabilize of US 4th quarter GDP comes in above expectations, or if corporate earnings this week are able to propel stock markets higher. There is a strong correlation between high yielding currencies and the broader stock indices, so if the next set of earnings results do not disappoint, we might see a stop to the free fall in currencies as well.
The latest cause of pessimism was seen when the last bond auction in Italy was met with unfavorable results (with 10-year yields in Europe’s number 3 economy rising to 4.7%). Markets have largely ignored agreements for bailout programs suggested by the EU finance ministers and the EUR/USD is now trading below the 1.28 level for the first time since November. Adding to the bearishness was the weak economic data out of the UK, and the announcement that the nation’s banks are operating at a deficit of $38 billion. This has essentially left the market with few safe haven outlets and will almost certainly ensure that we see a lower close for most of the commonly traded assets into the end of the week.
US GDP Next Macro Event Risk
The last potential upside market mover will be the US GDP release, which is expected to show a modest rise of 0.5% for the fourth quarter. These expectations are relatively tepid, so there is some scope here for an upside surprise (which would help to reverse some bearishness). In addition to this, we will have some corporate earnings reports (specifically, from BBRY), and currency traders should pay attention to these headlines as they will offer some indication of how currency markets are likely to perform into the end of the week. Markets are highly volatile at the moment (which favors breakout trading), so be sure to keep stop losses tight on any new positions.