The EURUSD is continuing to show nothing but one-way traffic sending its price lower, with it also appearing to look like there is no U-turn in sight anytime soon. The Eurodollar recorded yet another 11-year low at 1.1097 overnight, following the anti-austerity Syriza party winning the Greek general election. The downside risk this represented is not necessarily linked to a new party entering government, it’s more correlated to an anti-austerity party possibly reversing structural reforms that were starting to make progress to improve Greece’s dire economic situation.
The other risk this represents is that ant-austerity parties around Europe might take inspiration from an anti-austerity party taking control of Greece, and try their luck themselves. This would probably be seen as a potential nightmare scenario for European Central Bank (ECB) policymakers who repeatedly reiterate the need for increased structural reforms around Europe, and continue to express that extra stimulus measures on their own will probably not be enough to drag the Eurozone away from its own dire economic situation. Either way, the expectations for the EURUSD to reach parity this year are looking increasingly likely, with the pair already falling from 1.20 to 1.10 in January alone. The pair is basically stumbling down a steep hill, with substantial USD weakness being seen as the only way for the Euro to recover incredible losses.
All in all, I think it’s becoming clearer and clearer to many why the Swiss National Bank (SNB) discontinued its minimum exchange rate to the Euro. Although there are a variety of valid arguments to show that the whole situation could have been better handled, the ever-widening divergence in economic sentiment and monetary policy between the US Federal Reserve and ECB basically alerted the SNB towards the stark fact that what had already become losses to its balance sheet, were basically going to become liabilities that might never be recovered. This is what forced the SNB to discontinue its minimum exchange, in my opinion.
The increased investor demand we noticed for Gold after the uncertainty with the SNB appears to be drawing to a conclusion, with some profit-taking being noticed. After touching $1302 on Friday, Gold has approached $1285 in the early hours of Monday morning. This week sees a more regular flow of higher-risk US economic data, with the FOMC decision on Wednesday evening being the one most investors will be keeping a close eye on. With all the global economic uncertainty surrounding us at the moment, investors really need to be reassured again that the Federal Reserve still intends to begin raising US interest rates this year. I continue to expect them to do so, and a reiteration of this on Wednesday evening could lead to improved demand for the USD and put pressure on metals.
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As we open trading on Monday, the price of Crude Oil is at huge risk of recording a new low. This comes as no surprise whatsoever because basically, the economic conditions for the commodity have not changed in the slightest. Various central banks unexpectedly easing monetary policy further over the past week or so has allowed the bulls to attempt a bounce slightly higher. This has been because there is hope increased stimulus would improve demand for the commodity, however it just provided an excuse for the bulls to move higher in my opinion. The main catalyst behind the complete downfall in oil prices has been the over-powering supply and demand equation, which remains firmly weighted on the side of the bears.
The hopes that increased stimulus will improve demand are based on hypotheticals. Until increased demand for the commodity is being regularly noticed, it is going to remain incredibly difficult for the price to stabilize. Not only this, but there is a huge supply surplus of a reported two million barrels a day in the markets, which is acting to continuously pressure the price of oil. With increased production continuously being noticed by market participants, it also wouldn’t surprise me if the oversupply increases further. Overall, I still do not think the oil markets have found a floor and I would not be taken aback if we enter a new leg lower and head towards the low $40’s.
Follow Jameel on Twitter @Jameel_FXTM
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