Price action within the Forex markets yesterday proved indecisive during the opening bell in London, as global equities and the US Dollar, the benchmarks for their respective sides of the “risk on” vs. “risk off” argument remained unchanged. This however was soon to change, as the highly anticipated release of the US GDP results for the 3Q were released. US market participants reacted with the competing catalysts driving price action; which in the end clearly favoured renewed risk aversion. Stocks were heavily sold off and the Dollar was heavily favoured as GDP 3Q results were released slightly above expected figures – 2.5% vs 2.4%.

Following the release of the 3Q GBP, the US Dollar Index gained over 2%, with GBP/USD loosing almost 2 points from the Intra day high of 1.5963 and the EUR/USD, the most heavily traded forex pair in the market sank over 1.85% to 1.3347.

Risk sentiment has tightened its grip over the British Pound in recent days – as clearly demonstrated by its strong correlation to the MSCI world stock index, on the other hand however the correlation between the Euro and the underlying risk appetite in the market has faded, this primarily due to the fact that the Irish debt problems has obscured the relationship and therefore speculative positions in the market call for any short term gains to be purely corrective.

Concerns surrounding European debt crisis continued to weigh on the single currency and it is likely the Euro will continue to be weighed down by talks of further soveriegn debt risk concerns accross Europe. European policy makers made another attempt to talk down the risks for contagion, with European Central Bank board member Governor Miguel Angel Fernandez Ordonez, who also heads the Bank of Spain, stating that the region’s banking sector remains “strong”, but market participants are certainly showing little reaction to the claims with the Euro being heavily sold from its recent “highs” against virtually of its counterparts.

Breaking news elsewhere came from Asia, with North and South Korea exchanging artillery fire, heavily affecting the Asian stock market, US Stocks and Index futures which saw heavy losses following news correspondence around the world. Geopolitical tensions in Korea is yet another layer of uncertainty the markets don’t need and as a result there has been a strong influx towards the safely linked currencies. This in turn caused strong EUR/USD weakness, where investors fled the weak Euro for the relative safety of the US Dollar. USD/JPY has also seen movement this morning which may continue to react if tensions build.

The commodity sensitive currencies, including the AUD / NZD and CAD also saw some strong movement on Tuesday as the initial bounce in risk appetite that buoyed the Australian dollar against the US dollar fizzled out as markets fretted about a new Irish election and the likelihood of Portugal or Spain needing aid. Falling risk appetite pushed the Australian currency to a six-day low against its US counterpart, with the Aussie further hit by the ongoing declines in commodity prices, with both Gold and Iron Ore prices seeing losses in early trading yesterday. The NZD continues to track risk and has a strong correlation to the S& P 500 which yesterday witnessed early losses, the CAD continues to heavily track Crude oil prices which yesterday saw further losses as traders opted to sell their holdings to protect assets in the event energy demand falls amid global uncertainty.
One of the key issues impacting crude price movement, has been China’s ongoing efforts to control inflation. China has been a key importer of oil and other products to meet the needs of a robust economy that boosted inflation to a 25-month high in October. China’s now banning hoarding of oil, coal and other key commodities to ensure supplies and contain price increases.

Today the markets open up with a tense of ease as tension in the North / South Korea borders have calmed during the overnight trade with the USD still being favoured over both the Euro and the GBP. The Euro is still being heavily weighed down by fiscal concerns amongst investors and rumours in the market this morning suggest a bailout package will be reached topping €85billion – however this is yet to be confirmed. GBP/EUR opens up this morning up on the day trading at 0.85p Stg / 1.1834 with momentum to the upside likely to test 1.1885 resistance, EUR/USD continues its larger correction, with a low of 1.3253 in early European trading however is it likely the USD will continue its bearish run against the Euro with speculative targets likely to push for a test of 1.30 (Psychological level).

Tom Trevorrow

Senior Trader

Tel: +0044 1736 335264
Email : tom.trevorrow@torfx.com