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By Gaurav Kashyap, Alpari ME DMCC
Fed 'no plans' for QE2 extension boosts US Dollar
As if the ongoing Greek tragedy wasn't enough, last week saw the release of the FOMC rate decision. With no major expectations of a revision to the 0.25% rate, it was more about Bernanke's post decision comments. In a move which gave a significant boost to US Dollar bulls, the Fed President maintained that QE2 would be winding down as planned towards the end of this month and made no mention of plans of an extension or part three of such a program.
Instead Bernanke confirmed that the economic recovery is continuing at a moderate pace, albeit slower than the committee expected. The temporary soft patch of data had its effect on the US labour market conditions and general growth. Inflation didn't seem to be too large a threat in the eyes of the committee, as current levels were expected to fall to levels that were in line with the target rate.
The lack of additional quantitative easing measures, which were many were expected on the back of a poor run of economic data emerging from the US, saw the Dollar rally against most of the currency majors and the commodity markets. Further supporting the Greenback was weaker new home sales data during the month of May (319K act v 326K prev), representing a -2.1% drop month on month. Existing home sales data also kept risk appetite and equity markets in check, coming in much weaker than expectations (4.81M act v 5.00M exp). Friday's slightly improved US GDP reading (1.9% act v 1.8% prev) couldn't halt the Dollar Bulls and the Dow closed -0.4% lower on the week.
Bank of England minutes set tone for GBP sell off
Across the pond, the BoE's meeting minutes really set the tone for a weaker British Pound in last week's trading session. Wednesday's minutes showed that the voting pattern had changed, with the group calling for a hold increasing to 7 as opposed to 6 from a month ago. With more British central bankers digesting the poor run of numbers and adjusting their views from hawkish to dovish, the GBPUSD sold off rather aggressively to break through the 200 day moving average and settle below that key 1.60 level.
GBPUSD should continue to be pinned down by bearish growth forecasts in the UK, and tomorrow's GBP reading from the UK will also drive prices. With that key 200 day moving average level being broken, we look towards the 55 week moving average at 1.5875 for the next support in the pair.
Greece to agree austerity plan
It is going to be a big week for risk markets, Greece and the EU in general as the Greek parliament goes to work in agreeing a new austerity plan tomorrow. The Greek parliament will be voting on a EUR28.4bn austerity package which would be required if the EU & IMF are to release the next tranche of aid to the Mediterranean nation worth EUR12bn.
Eurogroup President Juncker stressed that the approval of additional austerity measures will be "absolutely crucial" and it must be given in order to move ahead with a decision, expected on July 3rd. Already an unpopular figure in his home land, PM Papandreou faces a tough challenge in convincing his parliament to pass additional measures which have already seen more than four hundred thousand jobs lost as well as industrial growth contracting 11%.
Opposition parties are already lining up calling for the Prime Minister's blood, and any negative vote would see Greece inch closer to the default scenario. Trading will be tight in the lead up to the vote, and we can expect to see a high degree of volatility in Euro pairs following the announcement. EURUSD has already fallen -0.62% in trading this past week, finding good support at the 100 day moving average of 1.4190.
Commodity markets take a hit
And finally, the commodity markets took a strong hit in trading last week. The bear rally was confirmed in the energy markets as the WTI crude contract dropped another -1.48% in trading last week. The WTI contract has fallen more than -9% in the past three weeks and Thursday's surprise announcement by the International Energy Association that they would pursue further stock draw downs saw the WTI crash through the 200 day moving average, settling just above 91 per barrel.
The IEA's announcement that their member countries would be tapping into their reserves to supply the oil markets was seen as a shock decision and could be seen as short term solution at best. Under the plan, the US will be releasing 30 million barrels this month, or half the amount pledged by the IEA. With a dearth of crude resources flowing into the market, the bearish momentum was confirmed and should ease Gasoline prices in the US which would be crucial in seeing President Obama getting reelected. Technically, there will be good buying support coming into WTI between 87.50 and 89 levels, a breach of this range will see the contract test 85 levels.
Staff
