This week, the news of expansion in Euro-zone firewall from Euro 440 billion to Euro 700 billion will help increase the firepower of European currency. It will reinforce Greece and allow it to go bust without spreading fears of spread of financial contagion to other countries.
It will also provide relief to taxpayers specially from Germany, which is the largest fund contributor. Meanwhile, UK's coalition government faces a challenging budget, which is due on Wednesday. Though election is not due until 2015, Fitch and Moody's warning that Britain's top rating is at risk has surely put them on alert.
Mending of economy is the key due to recessionary fear because of slowdown and some of the major challenges are high unemployment, high inflation and deficit.
So far Britain has a good record of controlled spending, which also means reduced government borrowing, but the real challenge is to combine spending with deficit in such a manner that more jobs are created, deficit is reduced and inflation pressure eases. It suggests that some sort of new tax could be imposed and balance be maintained by chopping the rich by imposing new taxes without damaging the domestic industry and the export sector.
It was FOMC announcement by Fed that unsettled the market. Although, Fed Chairman Ben Bernanke showed his concern about inflationary pressure building up due to higher oil prices, his stance remained dovish on US interest rate, as he once again reiterated his earlier view that he did not expect rate change until 2014.
Bernanke's easy approach towards monetary policy is probably stems from US economic recovery and significantly improved job conditions, which he may not be willing to risk. It was his controversial silence on quantitative easing (QE3) that rattled the US bond market and gold, as all hopes of an early QE3 faded.
Both US Treasuries and gold tumbled when the Fed Chairman opted to keep mum on the much awaited QE3 on liquidity concerns. "Operation Twist", will see the Fed buying $400 billion long-term treasury bonds by June 2012 and selling short-term debts.
Bond market nervousness increased when auction of USD 13 billion of 30-year US treasuries were sold at 3.383 pct yield, surging by 16 basis point to 3.42 pct yield. Normally such type of volatility is not witnessed in 30-year bond market.
According to latest Fed release, the total size of US treasuries of major foreign holdings of US Treasuries jumped from USD 4.436 trillion in December 2010 to USD 5.001 trillion in December 2011.
The Fed Chairman's approach characterised by prudence and questionable self-restraint in speech and behaviour on QE3 was a major setback for the Gold investors, which encouraged sellers and gold bulls were unable to defend $1695 - a key support level that sent gold tumbling, breaking two support levels of $1667 and $1645, respectively. Gold has found some support around $ 1635 after sliding USD 80.
Meanwhile, Euro could not make gains despite positive ZEW, German business confidence indicator, as FOMC statement was considered a positive development for USD.
But another major factor that hindered Euro's recovery was Europe's tilt towards the US on WTO dispute between the US and China over rare earths. Although, China is within its rights to limit export of commodities, US President Barrack Obama has said the US, the EU and Japan will take the dispute against China to the WTO. The pressure tactic could also be aimed at forcing China to make more commitments towards the IMF pool for the European debt crisis.
Euro also weakened on belief that Europe's softer approach towards the US could discourage China to invest in Europe as China has been purchasing Euro-zone bonds and investing in European projects.
However, Euro looking for excuse to surge made late weekend recovery after Friday's release of softer US inflation numbers, flat industrial output and lower consumer confidence Index number. A weak USD also helped Pound sterling, but Japanese Yen could not benefit from a battered USD, easing by 1.5 pct.
GOLD @ 1659.10 = Gold prices tumbled after the release of FOMC statement, as the Fed Chairman did not utter a single word on QE3. Market is still not clear and looking for a near-term direction.
And, India in its 2012-13 budget announcement decided to double customs duty on gold to four percent to narrow its current account deficit, which is not good news for the yellow metal. India roughly bought gold a record 969 tons of gold in 2011. It is striving to bring down its fiscal deficit to 5.1 pct due to rising oil price.
Indian bullion traders and jewellers have decided to protest against the raise in import duty. They have decided to close business for 3 days, which means a reduction in physical demand for gold.
Friday's US economic data was mild, easing the growing inflationary fears, which will taper down the sentiment and is also not supportive for gold.
However, despite all the negative factors, a preferred strategy would to buy gold on dips. Major support is around $ 1628 but $ 1640-42 may not be easy to surrender. It needs to make a clear break of $ 1668 on the upside for $1675 and as long as gold stays below $ 1690, the yellow metal will remain in a $ 1640-90 band.
FX & GOLD Weekly OutLook March 19-23
EURO @ 1.3173 = Euro will have a stronger tone this week and dips should be used as an opportunity to buy the European currency. Any upward move will find a strong resistance around 1.3220 with major at 1.3280 and failure to penetrate the 2nd resistance level will push the currency down to test 1.3125 zones before making another upside attempt. A break of 2nd resistance will pave way for 1.3320-40. However, any break below 1.3040 will entail risks for further Euro losses.
GBP @ 1.5842 = A bias for Cable will remain on the upside, but a quick profit is suggested as choppy market conditions could prevail due to UK budget announcement on Wednesday. Cable should hold 1.5790 as buying interest will be seen around those levels. First support is at 1.5740 with a major at 1.5670. Dips around support levels should be used for buying Pound Sterling as a break of 1.5880 will encourage for 1.5930.
YEN @ 83.43 = My month-old 83.65 target has been met with ease, but Yen has a potential for more losses. A break of 80.60 will encourage for 85.20. However, I will remain cautious and do not suggest hunting for the bottom as a break of 82.80 will see the Japanese currency surge towards 81.55
CHF @ 0.9154 = Swiss Franc will not behave as usual unless SNB has a surprise package to offer. Hence, Swiss currency should find resistance around 0.9110 before easing to test 0.9210-20 zones. Likely to hold before making further gains to test 0.9090, only a break would encourage for 0.9040.