To taper or not to taper,
that is the question that appears to be currently taxing investor mind-sets over the past 24 hours as equity markets and the US dollar retreat in tandem, as markets and investors attempt to try and position for the possibility of a small reduction in asset purchases at next week’s Fed meeting
This week’s comments from St. Louis Fed President James Bullard
has raised the real possibility that the Fed may well put any potential concerns about any damage done by the October government shutdown behind them and start to weigh a small reduction in stimulus, akin to dipping ones toe into a hot bath, in the hope any resulting market reaction won’t scald them.
They could well be helped in this decision by last night’s announcement by Republican Paul Ryan that a new budget deal could well be unveiled in the coming days
. The new deal, if approved by Congress, which seems likely, would last until 2015, and ease the severity of some recent budget cuts, with slightly higher spending levels of $63bn.
This agreement, while a positive for markets,
would then remove one potential land mine for markets ahead of February’s debt ceiling deadline, which still remains unresolved. It is likely that neither side will be pleased with the deal on the margins, but the hope is that enough Democrats and Republicans will be able to swallow it to be able to push it through Congress.
The reaction of bond markets and the US dollar
would appear to suggest that markets seem quite comfortable with the current track of events. It certainly does appear that a window of opportunity could be opening up for the Fed to act next week without a sharp market reaction, the only question remaining as to whether they will avail themselves of it.
In Europe EU leaders continue to wrangle over banking union
with mixed messages coming out as to whether anything tangible will be agreed by the end of the year. French finance minister Moscovici announced earlier this week that a deal could be agreed by year end but given how far apart the parties have been over the months this always seemed rather fanciful, a fact confirmed by German ECB board member Joerg Asmussen who suggested a final deal remained some way off.
On the economic data front
today its expected to be a fairly light day with only German CPI data for November
which is expected to be confirmed at 1.6%, reflecting the fact that any further easing from the ECB remains some way off despite the recent rate cut. In fact yesterday’s comments from ECB President Mario Draghi
seemed to underscore that when he stated that it was time for other actors in Europe to contribute in changing policy in Europe as a result of the time bought for them by the ECB, suggesting that no further imminent easing by the ECB was currently imminent.
– the euro continues to push incrementally higher with support now likely to come in at the previous resistance level at 1.3630. The first target remains the October highs at 1.3815, while behind that we have long term trend line resistance from the all-time highs at 1.6040 which comes in at 1.3935.
Any dips seem likely to find support at 1.3620 Only a break below the 1.3480 level would then argue for a move to the lows last week at 1.3400, and then below that 1.3300.
– we saw a new high for the year yesterday at 1.6467 with the main resistance remaining at or close to the 1.6520 level. We have trend line support from the 1.5950 lows currently at 1.6350, while only a move below the 1.6250 level argues for a deeper pullback towards 1.6110.
– while below the 0.8400 level the risk remains for a slide back lower. The key resistance remains below the highs of the last four weeks at 0.8415. For the move towards 0.8170 to play out we need to see a move back below the 0.8320 area, which acted as initial resistance after last weeks low at 0.8250.
– having topped out at 103.40 twice in the space of a week we could be set for a pullback from the highs having so far failed to overcome the 103.75 level and May highs. A move beyond here targets 105.70 the 61.8% retracement of the down move from the 2007 highs at 124.30 to the 75.30 lows. Yesterday’s bearish engulfing daily candle opens up the risk of a move back towards the 100.60 area with interim support at last weeks low at 101.60.
CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.