Currency Briefing: Syrian uncertainty and risk-aversion dominate the markets

on Aug 28, 2013
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EUR/USD has once again been sidelined as the risk aversion that seems to have hit the market on the Syria news seems to have had no great impact on the single currency, for now. Escalating political tensions between Syria and the U.S. however, started to bite into markets Tuesday, with U.S. Treasury debt prices, oil prices and safe-haven currencies all climbing as expectations of military intervention grew.

Syria`s Foreign Minister said on Tuesday that his country will defend itself by “all means available” against any military attack led by the U.S. the foreign minister denied “utterly and completely” accusations that his government used chemical weapons or toxins against its population while accusing the U.S. of defying international law and a continuing UN investigation into the incident.

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Germany`s Ifo business climate survey in August came out on Tuesday at 107.5, just ahead of consensus for 107.0. The current assessment index was 112.0 (consensus 111.0), while expectations were for 103.3 (consensus 103.1). The result was probably not a big enough triumph to propel EUR/USD through the $1.3400 mark and the most traded currency pair retreated about half a cent.

Data from the U.S. on Tuesday confirmed the upbeat tone for the economy. U.S. home prices increased 2.2 per cent in June, another month of fast growth but slower than May, with gains in all 20 cities tracked by the S&P/Case-Schiller gauge, according to data released on Tuesday; The U.S. Consumer Confidence Index rose slightly in August to 81.5 from 80.0 in July, the Board reported on Tuesday. Lynn Franco, Director of economic indicators at the Conference Board confirmed in a statement “consumers were moderately more upbeat about business, job and earning prospects” in the present month in comparison with the prior one.

A long list of data is on the economic calendar for Wednesday with the most meaningful being the German Consumer Confidence survey for September (07:00 BST), UBS Consumer indicator for July (07:00 BST), Mark Carney’s speech to the UK Parliament (12:45 BST) and U.S. Pending Home Sales for July (15:00 BST).
Consumer confidence in Germany climbed last month to 7 per cent, after hitting 6.8 per cent in July. The GfK think tank surveys 2,000 households on their expectations about pay and the economy as a whole and their willingness to spend money. Consumers believed it wise to make purchases last month, with many seeing no point in saving money with interest rates being at record-low levels. Additionally, pay expectations climbed for the fourth month in a row mainly because of the rosy outlook and a continuously high employment rate in the country. September consumer confidence in Germany will most probably show a slight improvement on Wednesday, but will it be sufficient to push the euro optimism above the previous week’s high at $1.3453, or it will be Syrian tensions and the following risk-aversion sentiment that will do that job?

Bank of England Governor Mark Carney will speak to the British Parliament on Wednesday in order to explain how monetary policy could improve the country’s economy. Mr. Carney`s first policy announcement earlier this month was that interest rates will remain unchanged and QE will remain in place, at least until unemployment falls below 7 per cent (from its current 7.8 per cent). Though forward guidance is a useful part of the modern central banks` toolkit, markets were initially confused. The pound initially fell sharply, and then recovered, while long-term government borrowing cost rose by around 30 basis points.
According to Sebastian MacKay, fund manager at Standard Life Investments, Mr. Carney “will probably lean against the market fairly aggressively to keep rates low, but he cannot afford to box himself in because if U.K. data shows the economy continuing to improve, he may well have to increase rates before 2016”. Technically speaking, an interim top is likely to be formed around the last week`s top at $1.5716 and for this to be confirmed the cable will have to fall through the mid-August low at $1.5424.

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