The Forex market has once again woken up to the now all too familiar impact of tempestuous European doubt.
The dollar increased by 1% against the Euro, as a result of resistance to the expansion of the European Financial Stability Facility (EFSF). The EFSF represents not only a safety net for European debt concerns but also a powerful safety blanket, cushioning market sentiment and trading risk. Any reduction in size or prevention of growth not only reduces the leveraged impact of this facility but also triggers reaction from an already highly sensitive market sentiment.
This residual doubt looks set to be a consistent theme for the week with the imminent results of the EFSF focused Brussels meeting likely to impact forex trading and the ZEW economic sentiment survey well and truly on the trading horizon. The success of the European bond auctions last week seems to have done little to dispel market prejudice surrounding Euro stability.
Beyond the microcosm of Euro fragility is the broader perception of financial policy, which has been mingling around Sterling value. The Bank of England has faced a barrage of criticism for its lack luster reaction to inflationary levels which are well beyond the Bank of England target levels. Traders are beginning to circle around the possibility of an adjustment in policy and interest rates in reaction to this growing inflation. Ernst and Young have attempted to dissipate these rumors by advising the Bank of England to hold its ground, a showdown ensues. Traders will move closer to a resolve regarding these interest rate decisions when the Bank of England’s January latest minutes are released.
Forex traders were quick to pick up on the slightest whiff of caution within the Chinese Markets, as the Central Bank of China urged Chinese banks to increase reserves. This request amalgamated with rising Chinese property prices, leading the Shanghai Composite Index to drop by 3%.
Tumbling Asian Markets has a domino effect on the value of the Australian Dollar which has innate ties with the Asian export markets.
The Aussie Dollar was also hit by growing inflation concerns as it battles to control rising costs for building materials and foo; a consequence of the Queensland floods. The Reserve Bank of Australia may soon be forced to lift interest rates in order to buffer increasing inflation.
Rising Euro concerns and shifting Asian markets, have swayed the global trading gaze to the Japanese Yen as a risk adverse outlet. The Yen is mopping up investors seeking a less chaotic currency option, resulting in a rapid rise in the value of the Yen.
