Forex Market Review 05/31/2010

 Market Analysis by

The Euro fell sharply on Friday as Fitch Ratings slashed Spain’s long term credit rating, fueling concerns about Europe’s sovereign debt crisis.  Fitch downgraded Spain’s debt rating to AA+, stating that the country will not recover as quickly as Spanish government had previously forecasted.
In regards to the Greek debt crisis, European Central Bank Executive Board member Lorenzo Bini Smaghi stated that investors are ill advised to expect a euro-nation to default and that policy makers will take all the necessary steps to defend the single currency region.  In Greece, the government has adopted austerity measures equal to almost 14% of its GDP. According to the Greek Finance Minister, the debt stricken nation will not restructure its debt and will not require additional cutbacks in order to meet the fiscal targets determined by the joint EU/IMF rescue package.

Also hurting the Euro is the fact that forex investors have begun to use the single currency to fund their carry trades. Now instead of shorting the 0.25% yielding dollar and yen, they are choosing to sell the Euro, even though its yield is still at a 1.0%. 

A support line of $1.2204 can be seen for now; however, if it does not hold the key support of $1.2155 should be watched. The EURUSD has tried to test the resistance at $1.2450 but for now the EURUSD graph looks bearish.

While the U.K continues on its path to recovery from the worst recession since World War II, the country’s recovery remains vulnerable to the worsening sovereign debt crisis next door in the Euro Zone.
News was quiet from the UK last week as the parliament began working on its new budget.  The new government wants to cut £6 billion from its budget.  While there has been little opposition to these plans, definite obstacles lie ahead as newly elected Prime Minister David Cameron plans on reducing welfare benefits- an issue that is sure to cause protests and may prove  to be a more difficult to implement. Beyond the UK budget talks, Forex traders will want to watch for key UK PMI and housing figures that will be released this week.  The UK’s economic turnaround which began last spring has slowly been stalling; therefore, traders will be eager to see whether in fact the UK is at risk of experiencing a double dip recession, or whether growth is returning. 

The Yen fell across the board as speculations increased that the political turmoil in Japan will harm the currency’s “safe-haven” appeal.  The Japanese currency tumbled after a poll revealed that more than half the nation wants Prime Minister Yukio Hatoyama to resign.

In this morning’s trading session, the “safe haven” currency tumbled to 91.54 yen per dollar from 91.06 on Friday. Last week, rising equity prices prompted trader to sell the safe haven currency. As a result, the USDJPY which had seemed destined to trade back below 89.00 rose above 91.00.

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