Talking Forex: Weekly Outlook

Even though there was little progress made on resolving the political stalemate in Italy, while press reports over the weekend indicated that Bank of Cyprus depositors could lose up to 60% of their savings, the pair settled higher on Monday after the release of weaker than expected U.S. Manufacturing ISM data weighed on the USD. In other news, according to data gathered by the IMF, developing economies shed some USD 45bln of EUR in 2012 and have sold close to USD 90bln worth of EUR since the second quarter of 2011. The EUR represents just 24% of their reserves, the lowest level since 2002 and down from a peak of 31% in 2009. Separately, France missed its budget deficit target in 2012, as it will again this year, underlining the severe challenge facing President François Hollande’s socialist government in meeting key commitments to its European partners on managing its public finances. At the same time, according to El Pais citing sources, the Spanish government has asked the European Union to ease its 2013 deficit target to 6% of GDP from the original target of 4.5% of GDP on a worse-than-expected economic performance. The focus this week will be on the ECB meeting, where the governing council is expected to keep the benchmark rate unchanged and also refrain from announcing any new policy easing measures. The press conference will likely be dominated by questions on Cyprus and the political gridlock in Italy.

GBP/USD
Similarly to EUR/USD, the pair settled higher on Monday on the back of broad based USD weakness which stemmed from lower than expected US ISM Manufacturing report. There was little in terms of fresh macroeconomic news flow and apart from digesting the news flow relating to Cyprus and Italy, market participants will also await the outcome of the latest MPC meeting. The benchmark rate and the Asset Purchase Facility (APF) expected to be kept unchanged.

USD/JPY
The pair settled lower on Monday, as profit taking related flows, as well as comments from Japanese economy minister Amari who said that a weaker JPY impact will cause unfavourable price rises weighed on the pair. Still, some of the brief JPY strength was offset by Amari adding that economic growth can absorb impact of higher prices. Separately, Asahi reported citing sources that the BoJ is to consider bringing forward the start of its plan to begin open-ended asset purchases from 2014. However it remains to be seen whether or not the BoJ will meet market expectations when the central bankers meet later on this week. Still, the underlying trend remains firmly bullish and there is little indication that market participants are willing to bet against the BoJ just yet.