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Forex Market Outlook 10/19/11

By Mike Conlon, on Oct 19, 2011

Yesterday’s market turn-around exemplifies the type of market action we may continue to see until the Euro debt crisis is finally resolved to the satisfaction of the world. Yes, I said the world. Markets yesterday were selling off on lowered expectations that this weekend’s European summit would produce that resolution, but a rumor hit the tape from a newspaper in Euro that said that France and Germany had agreed to expand the size of the ESFS to 2 trillion euros, much larger than had been previously agreed upon.

This sent markets screaming higher into the close as it was risk-on again and the correlations not only held up but also lead the way. This kicked the weaker economic data to the back again as the hope of a credible deal left markets wanting more. Moody’s attempted to rain on the risk appetite parade by downgrading Spain again but the markets will have none of it. Riots in Greece make the Occupy Wall St. crowd look like rank amateurs as the new austerity measures are announced.

So we have the carry-over affects this morning taking place, and better than expected economic data from today’s docket has confirmed the move. US corporate stock earnings are starting to look better, though Apple missed earnings for the first time in 4 years last night. The markets seemingly want to go higher if not for the specter of risk hanging over them in the form of the Euro debt crisis.

In the UK, the BOE released the minutes to their most recent rate policy meeting which showed a unanimous vote to expand their QE program by 75 billion pounds, even though yesterday’s inflation data pushed above 5% for the first time in 3 years. BOE policy-makers believe this to be a temporary spike, but that remains to be seen. Especially if a Euro debt resolution allows markets (including commodities) to fly again.

Here in the US, CPI data came in as expected and slightly lower which some might find surprising after yesterdays higher than expected PPI data. Core CPI came in at 2% vs. an expected 2.1% and the headline number came in at 3.9% as expected. Indeed the Fed is dodging bullets as the money-pump continues. My feeling is that it is just a matter of time before inflation rears its ugly head and when it does it will be fast and furious.

But the best news of the morning may be the housing starts figures which show a gain of 15% vs. an expected 3.3%. Recent lousy weather may have distorted those figures as housing starts were delayed, but nevertheless it is an impressive number. Building permits came in lower than expected, posting a decline of 5% vs. an expected decline of 2.4%.

It will be interesting to see how the rest of the day plays out as stocks here in the US are set to open higher and risk appetite is also increased. However, a closer inspection of the numbers and rumors may prove to warrant a more reserved position as perhaps the market is getting a bit ahead of itself.


Mike Conlon,
Senior Forex Mentor