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Forex News Top Stories Forex Market Outlook 12/8/11

This morning all eyes are on the Euro zone after the two rate policy decisions from the BOE and ECB produced what was expected.  The BOE made no change to policy and the ECB reduced interest rates by 25bp, though some in the market may have been hoping for a bit more from the ECB.

This underscores the need for liquidity in the system and Draghi’s accompanying statements are likely to produce volatility throughout the morning.  Tomorrow’s results of the EU Leaders summit in Brussels will likely produce nothing that will resolve the debt crisis to the market’s satisfaction.  A looming S&P downgrade of European countries including Germany could have ramifications but this is likely going to be similar to the downgrade of the US due to political gridlock.

Earlier this morning in Australia the unemployment rate ticked higher to 5.3% as 6300 jobs were lost vs. an expectation that 10K jobs would be added.  However the Aussie rallied higher after the initial sell-off when it was revealed that the participation rate increased more than expected which could have distorted the figure.

In New Zealand yesterday, the  RBNZ kept interest rates unchanged at 2.5% which puts them in “wait and see” mode and tomorrow’s release of some Chinese economic data could influence the kiwi.  Consumer confidence figures for NZ are also due out tomorrow.

Overnight in Japan, trade balance figures came in better than expected an tomorrow’s GDP release could cause further yen strength.  The yen has been strengthening this morning but has just reversed on some comments from Draghi and the ECB (see more below for this recent developments).

In the US, initial jobless claims came in much better than expected posting losses of 381K jobs which is the best number we have seen in some time.  This has helped increase risk appetite and the futures market has rallied a bit until Draghi’s comments have soured risk appetite.

Things were moving along nicely until Draghi said the “D” word– deflation.  This immediately reversed the market as this essentially means that he is going to print money in the same manner that Bernanke and the Fed do, or at least that’s what the markets believe.

So the Euro has weakened considerably and the US dollar has strengthened going into the US stock market open.  The ranges are widening and the volatility persists so the fate of the Euro and other markets may lie with the EU Leaders meeting tomorrow.  This unfortunately does not give me confidence.