This week, the news of increase in Euro-zone firewall to Euro 700 billion from Euro 440 billion will help to increase the firepower of in European currency that was demanded to strengthen Euro-zone. It will help the region to prevent contagion in case Greece burst. It will also provide relief to tax payers specially the Germans, which is largest fund contributor. Though there is a long debate on the subject that for full protection, more than double amount will be required.
Meanwhile, UK’s collation government faces a challenging budget, which is due on Wednesday. Though election is not due until 2015, but Fitch and Moody’s warning over Brittan’s top rating is at risk has surely kept them on alert.
Mending of economy is the key due to recessionary fear because of slowdown and some of the major challenges are high unemployment, high inflation and high deficit.
So far Brittan’s has a good record of controlled spending, which also means reduced government borrowing, but the real challenge is to combine spending with deficit in such a manner that more jobs are created, deficit is reduced and inflation pressure eases. It suggest that some sort of new tax could be imposed and balance be maintained by chopping the rich by imposing new taxes without damaging the domestic industry and the exports sector.
It was Feds FOMC announcement that unsettled the market. Although, Fed Chairman Bernanke showed his concern about inflationary pressure building up due to higher oil prices, but his stance remained dovish on US interest rate, as he once again reiterated his earlier view that he does not expect rate change until 2014.
Bernanke’s easy approach towards his monetary policy is probably due to US economic recovery and improving job condition, which he may not be willing to risk. It was his silence on quantitative easing (QE3) that rattled the US bond market and gold, as all hope of early QE3 faded.
Both US Treasuries and gold tumbled when FED Chairman opted to keep mum on the much awaited QE3 on liquidity concern. Oliver twist, swap facility provided by the FED to ease liquidity condition is the next big thing that is due in June.
Bond market nervousness increased when auction of USD 13 billion of 30-years US treasuries were sold at 3.383 pct yield, which is highest since August 2012 surging by 16 basis point to 3.42 pct yield. Normally such type of volatility is not witnessed in 30-year bond market.
According to latest FED release the total size of US treasuries of major foreign holdings of US Treasuries jumped from USD 4.436 trillion in December 2010 to USD 5.001 trillion in December 2011.
Fed Chairman’s quite approach on QE3 was a major setback for the Gold investors, which encouraged sellers and gold bulls were unable to defend $ 1695 a key support level that send gold tumbling breaking two support level $ 16670 and $ 1645 respectively. Gold has found some support around $ 1635 after sliding USD 80.
Meanwhile, Euro could not make gains despite positive ZEW, German business confidence indicator, as FOMC statement was considered positive for USD.
But another major factor that hindered Euro’s recovery was Europe’s tilt towards USA on WTO dispute between USA and China on refusal by the Chinese to allow export of rare earth minerals. The pressure tactic could also be possible to force China to make more commitment towards IMF pool for European bailout.
Euro also weakened on belief that Europe’s softer approach towards USA could discourage China to invest in Europe as China has been purchasing Euro-zone binds and investing in European project.
However, Euro looking for excuse to surge made late weekend recovery after Friday’s release of softer US inflation number, flat industrial output and lower consumer confidence Index number. Weak USD also helped Pound sterling, but Japanese Yen could not benefit from weak USD easing by 1.5 pct.
GOLD @ 1659.10 = Gold prices tumbled after the release of FOMC statement, as Fed Chairman did not utter a single word on QE3. Market is still not clear and looking for near term direction.
And in most recent development that India in its budget announcement decided to hike import duty on gold due narrow its current account deficit is not good news for the yellow metal. India that last fiscal year has roughly bought gold worth USD 32-34 billion is struggling hard to bring down its fiscal deficit to 5.1 pct due to rising oil price.
Indian billion traders and jewelers have decided to protest against imposition of import duty and decided to close business for 3-days, which means reduction in physical demand for gold.
Friday’s US economic data was mild reducing the growing inflationary fear, which will taper down the sentiment and is also not supportive for gold.
However, despite all the negative factors, preferred strategy would to buy Gold on dips. Major support is around $ 1628 but $ 1640-42 may not be easy to surrender. It needs to make a clear break of $ 1668 on the upside for $1675 and as long as gold stays below $ 1690, gold will remain in $ 1640-90 band.
EURO @ 1.3173 = Euro will have a stronger tone this week and dips should be used as opportunity to buy the European currency. Any up move will find strong resistance around 1.3220 with major at 1.3280 and failure to penetrate the 2nd resistance level will push the currency down to test 1.3125 zones before making another upside attempt. Break of 2nd resistance will pave way for 1.3320-40. However, any break below 1.3040 risks for further Euro losses.
GBP @ 1.5842 = Bias for Cable will remain on the upside, but quick profit is suggested as choppy market condition could prevail due to UK budget announcement on Wednesday. Cable should hold 1.5790 as buying interest will be seen around those levels. 2st support is at 1.5740 with major at 1.5670. Dips around support levels should be used for buying Pound Sterling as break of 1.5880 will encourage for 1.5930.
YEN @ 83.43 = My month old target 83.65 is met with ease, but Yen has potential for more losses a break of 84.60 will encourage for 85.20. However, I will remain cautious and do not suggest hunting for the bottom, as break of 82.80 will see the Japanese currency surge towards 81.55
CHF @ 0.9154 = Swiss Franc will not behave usually unless SNB has a surprise package to offer. Hence, Swiss currency should find resistance around 0.9110 before easing to test 0.9210-20 zones. Likely to hold before making further gains to test 0.9090, only break would encourage for 0.9040
March 12-16 - FeD & EcO DaTA KeY ThiS WeeK