Week in FX Europe – EUR deflates after EU data and US employment

This week has been a rollercoaster ride for the euro. The uncertainty surrounding the fiscal cliff in the US boosted the single currency against the US dollar. Going off the cliff for a day and the watered down agreement continued the trend as the euro climbed as high as 1.3299 on Wednesday.

The last few days however, the euro has nosedived since. With the fiscal cliff behind us, with the debt ceiling debate in the horizon, the markets refocused on Euro-zone data, and were not impressed with some soft PMI numbers out of the Eurozone. Another factor weighing on market sentiment is the release of the minutes of the December FOMC meeting, where the suggestion was raised to end QE4 sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar.

As we move into 2103, the markets are closely watching Europe’s banking sector, which has been hard hit by the debt crisis. This dire situation has led to a sharp drop in the amount of bank loans to private households. Such loans dropped by 0.8% in November compared to a year ago, after a similar decline in October.

The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.

Cliff Deal Passed – EUR/USD reaction
Germany Plans to Cut 6 billion to Reach a Balanced Budget
Friday Economic Releases Positive for Eurozone Worrisome for UK
German Retail Sales Rise 2.1 percent in November
Strong austerity measures allow Latvia to pay back IMF bailout funds – Good or bad?
Europe Factory Activity Falls in December
UK Manufacturing Expands in December
France Hollande Will Keep Pushing for Supertax
Portuguese Controversial Budget to be Decided in Court
German Elections in 2013 A look at one of Merkel’s Rivals
UK Manufacturing Rises to 15 month high

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