Sterling rally’s to home in on 1.18 level against the Euro

US Dollar:

Traditionally, major trends do not develop before speculative liquidity is scheduled to evaporate or before the release of major event risk. This is a custom that is typically observed by traders who are more inter¬ested in self-preservation rather than breaking any unspoken decorum. The risk that a serious reversal in risk could send positions hurtling against them or a drop in speculative participation warps volatility is usually enough to keep market participants on the fence. Yet, we can see that the market isn’t falling back to these hab¬its with risk aversion picking up its pace. Though we are less than 24 hours away from the US market packing it up for extended holiday weekend, we have seen benchmark assets mark critical breaks across the board. From the FX market, this drive is well reflected in the performance of the US dollar. The trade weighted Dollar Index rallied 1.3 percent, its best performance since October 19th to an eight-week high. The same meaningful per¬formance was reproduced in EURUSD’s dive below 1.35, GBPUSD’s break of a multi-month rising trend chan¬nel and reversal progress for AUDUSD and NZDUSD. For a more rudimentary gauge of risk appetite, it is worth noting that both the S&P 500 and Dow Jones Industrial Average produced their biggest declines in a week and threatened bigger reversals. That said, both indexes have held up critical support levels 1,175 and 11,000 re¬spectively that could prevent the adoption of a larger trend in risk aversion. It will be important to watch these levels
DATA : Core durable goods, Unemployment claims and New homes sales.

Pound:

The British pound has performed well against the euro. However, against the dollar and yen, we see the currency align itself in the risk scheme. With heavy exposure to Ireland, the UK is leveraging the weight al-ready set by its own austerity measures. In the event that these broader concerns ease up scheduled event risk could once again weigh in. Revisions to the 3Q GDP figures can carry notable surprises. With political uncer¬tainty in Ireland leaving the possibility of a delay to any bailout deal and contagion fears growing, sterling gained one percent against the euro. But it slid versus the dollar as it is still seen as a risky currency. Analysts say Brit¬ain stands to gain from the stabilisation of the Irish banking system, with the Bank for International Settlements estimating UK banks had $222.4 billion exposure to Irish borrowers as recently as September.
DATA : Revised GDP.

Euro:

European financial concerns were once against crowding out headlines. A figure was agreed upon for Ireland’s bailout; but clearly, the investment community’s fears run deeper than just this one EU member. With a second country being forced to seek aid by the market; a big step has been taken so that a once-isolated threat with Greece’s troubles now has a regional tone. Officials are now struggling to stem the bleeding, which first sending investment capital from Europe to the US among other destinations and the threat of crisis is depress¬ing sentiment globally. On the one hand, this has the sense of being a natural loss of confidence which is lead¬ing to the critical drain on liquidity; but the speculative effort is growing at the same time. Short positions on European government debt is lamented for its very real-world financial and economic impact; but passing regu¬lation on this point is not something that would be easy.
DATA : German IFO business climate.

General:

The New Zealand was one of the biggest losers through Tuesday thanks to the combination of the sovereign downgrade and the general deterioration in risk trends. However, without follow through on these larger trends, follow through on individual assets like NZDUSD will stall.

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