Forex Weekend wrap

A lot of talk, but little action, over the weekend. Italy's President Napollitano is reported to want to bring in another technocrat government to get over the current stalemate that arose from last week's elections. Any plan would likely be hugely unpopular amongst the current party candidates, with comedian Beppe Grillo the most vocal in his disdain for the proposals "I repeat for the umpteenth time, the Five Star Movement will not back any government... We're not a political party, we're a civic revolution. This country is in ruins with two trillion in debts and we have to rebuild it from scratch". Mr Grillo has also warned that he would consider leaving the Euro and returning to the Lira in order to get Italy's debt mountain under control.

But as we said at the top, a lot of talk and little action. In fact, the only action to come out of Italy so far is for President Napollitano to move forward the first meeting of parliament from the 15th March to the 12th March - Not really the type of leadership you'd expect at a time like this. Markets are beginning to wise up to the lack of progress too, on Friday markets flirted with a Euro below USD 1.30 and have picked that ball back up this morning. A rather interesting point of view, which we agree with, is John Taylor's - he runs a $3bn FX fund and believes the Euro is avoiding the attention that it deserves for now, but once markets re-focus their gaze across the channel "we will see the Euro turn very ugly".

The Euro turning ugly is something that French Industrial Minister Arnaud Montebourg would quite like to see. Mr Montebourg has repeated his calls that "The European Central Bank is remarkably inactive in a period when we need activism... We are asking Mario Draghi to give us the weapons to fight unfair globalisation so as not to be the naive people of the global village.... Mr Draghi said the ECB could buy public debt, now it must be done". The French do seem to be the most vocal in their opinion that the Euro is too strong, but they are probably just saying what a number of states (excluding Germany) are thinking.

The possible turn towards an ugly Euro is not to say that Sterling has seen the worst of it though and this week could be pivotal for the Pound. On Friday we saw Sterling dip below $1.50 after shifting nearly two cents through the day on little to no market data. The move was followed up by a number of commentaries from tier one banks restating their calls for a Pound below $1.45. This week could well be the week we see such a move, if the Bank of England do decide to take interest rates lower, or do add more money to the asset purchase programme (QE) - neither of which you would particularly wish to bet against. The only factor holding the MPC back will be the upcoming budget announcement from George Osborne later in the month.

Also this week we see the ECB meeting to discuss interest rate policy, but it is unlikely we will get any change of tune from the "price stability" and "governments must commit to sound economic and financial policies" rhetoric. As always, Mario Draghi's words will probably be a bigger market mover than the actual rate announcement and he could well talk down the Euro with a few carefully chosen and expertly delivered lines. Now the market is used to a sub 1.30 Euro, it could be quite easy to get it trading lower by a couple of cents should he so wish.

Aside from Central banks, markets will be focusing on the US quite heavily. Friday saw the sequester signed in by the President and over the coming weeks the market will be able to quantify what the cuts actually mean to them. This week traders will be looking at monthly Non Farm payrolls figures and the data that precedes them, starting on Wednesday with the ADP employment report. Unemployment in the states has stuck rather stubbornly at around 7.8% and though we see no dramatic change to that this month, hopes will be on the private sector creating more jobs to take up some of the slack that will be created by sequester cuts.

Thank you CM Trading

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