The current stability in the European market is based on expectations in that the ECB will finally be able to buy bonds, which will put a cap on sovereign bond yields. But in reality this is not possible a favourable German court ruling that should allow on September 12 the European Central Bank to make direct purchase of bonds. Or else, an adverse impact will be seen in the global financial market if the constitutional court disagrees with the European policymakers' bond buying demand.
Another supportive factor that helped market to rally is the outcome of release of Federal Open Market Committee (FOMC) August 01 minutes that indicate more Fed members are tilting towards another round of bond purchase, which is commonly known as quantitative easing (QE3). There are 12 Fed voting members that are responsible for the monetary stance.
But the language of the Fed minutes does not necessarily mean that another easing is guaranteed because the next monetary policy announcement will be due after the passage of 6 weeks on September 13 and the minutes of the meeting clearly stated that they will be watching the release of more US economic data for a clear-cut direction.
There is a huge debate about the benefits of US easing policy. Ben Bernanke had to face tough questions after the last FOMC meeting. He had to explain the economic gains during his presentation to the Congress. He countered Congressmen by pointing towards the urgent need for addressing the issue of "fiscal cliff" and requested for quick political understanding that expires in January, which will increase taxes and halt spending.
In a recent development, Bernanke, in his response through a letter addressed to the Capitol Hill lawmaker that mostly covered minutes of the last FOMC, hinted at a positive outcome of Operation Twist, but added that the future direction on easing would largely depend on a close examination of the US economic data.
The most interesting point to note is that the FOMC minutes only covered economic activity of previous two months - June and July. The US economic data released in the month of August has, however, shown reasonable economic recovery and continuation of current trend could dampen the ongoing easing sentiments.
Easing has its own pros and cons and the timing could put a big question mark as the US presidential election is knocking the door. The US economy is growing at round 2 percent, which is reasonable and further contraction by around another 0.2 pct should be OK. The US economic numbers suggest that unemployment rate would continue to hover around 8.3 percent. Recent economic numbers also suggest that in coming months the US payroll could average around 130.000 to 150.000, which may not require another easing until US economy further deteriorates. The risk of a third-time easing could lead to a severe inflationary impact, which is well under 2 percent target. So in all probability I am still not a QE3 fan.
However, we may be heading for tougher times in the days to come, as Greece remains an unresolved issue and still needs funding worth billions of euros to avoid bankruptcy. Greece's is hardly 2 percent of the size of Eurozone economy. But Greece's fresh demand asking for more time to implement austerity measures could be pain in the neck for German government and the "TRIOKA" of inspectors from the IMF, the EU and the ECB that will be submitting report on Greece, as Greece exit from Euro is not affordable for the European financial market. Spain's and Italy's fate will largely depend on German constitutional court's verdict, as these two economies face potential threats of flight of capital.
The market will be focusing on the release of US economic data for more clues, as Monday's Shiller home price index, Wednesday's 2nd quarter GDP revision, Thursday's personal spending and income and Friday's Chicago PMI will give a better picture about the economic progress in the US. But most likely due to numerous events this week, market will remain confused and choppy.
GOLD @ $1670.30 = Bias is on upside, as a break and weekly close above $1655 have opened gates for more gains and unless gold falls below $1648 we could see some more upward moves. A break of $1678 will pave way for a test of $1685-88 zones. Prefer buying on dips around $1655-58. But watch out for sharp correction that could also occur due to thin trading volume in gold.
EURO @ 1.2510 = Euro has good support around 1.2420-40 levels; it should hold for another attempt towards1.2585-95. A break could push the European currency towards 1.2630-50, but it is likely to exhaust for another test of downside support level.
Range for the week: 1.2370 - 1.2680
GBP @ 1.5809 = Cable has support around 1.5720 and only a break could see another 50 pip drop before bouncing back, but GBP has potential to attack 1.5880 and a break would encourage for a test of 1.5950. Range for the week: 1.5640 - 1.5980
JPY @ 78.64 = Bias for the Japanese currency is on the downside as yen is likely to weaken and find resistance around 78.10-20. A potential break of 78.95 will encourage for the test of 79.30-50 zones. Ranges for the week: 78.05- 79.80
CHF @ 0.9596 = Swiss Franc may continue its firmer tone as it may hold around 0.9650-70 zones for 0.9535. A break would see more gains for the Swiss currency that could test 0.9480: the range for the week 0.9450 - 0.9690.
AUD @ 1.0402 = The current fall could extend up to 1.0320, buying interest could emerge as 1.2070 should not surrender for a move towards 1.0470-80, a break would encourage for a test of 1.0540 zones. Range for the week: 1.0270 - 1.0550.