The main attention over the past few weeks has been on the US economy and dollar. There has been a tentative shift in sentiment over the past few days and there is a strong probability that the Euro-zone will be in greater focus over the next few weeks. The structural weaknesses are still very important and the bad-debt situation in the banks has not been dealt with during 2009. Credit conditions are also liable to deteriorate. Option expiry is liable to trigger further volatility in the very short term with immediate Euro support at 1.48, but the net risks suggest that the Euro will weaken to 1.4650 against the dollar next week.
The Euro weakened to lows around 1.4840 against the dollar on Thursday as technical considerations tended to dominate within narrow ranges. The Euro was also unsettled to some extent by a general increase in risk aversion. The dollar was unable to make a serious attempt on breaking Euro support in the 1.4820 region as markets lacked momentum.
The US Philadelphia Fed manufacturing index was stronger than expected with a further increase in the headline index to 16.7 from 11.5 the previous month. The employment component remained negative, but was at the highest level for over 12 months. Leading indicators rose a further 0.3% for October.
In this environment, the Euro rose back to above 1.49 as Fed officials also remained generally very cautious over the economic outlook which maintained expectations of very low short-term interest rates over the next few months. The option positions which have been defended this week are due to expire on Friday and this could trigger higher volatility later in the session as markets look to break from recent narrow ranges.
The Euro weakened again on Friday with the 1.48 level tested again. Confidence in the Euro-zone was weaker and the internal strains were starting to show with the spread on Greek bonds over German bonds widening to five-month highs.
