Behavioral Finance: Daily Forex Outlook: Desperate Optimism?

EUR/USD (1.3335) Even as banks, lawyers, brokers and big businesses prepare contingency plans for a possible eurozone breakup, the markets nevertheless seem to be pinning their hopes on the outcome of the ongoing EU Finance Ministers meeting. The expectations exist despite any confirmation of new sources of capital or policy options that would increase the clout of the rescue tools. It is the dramatic deterioration in the economic environment, which the markets hope will persuade the EU financial ministers to deliver a real jolt. However, even the politicians now concede that the new avatar of EFSF as a partial insurer of limited number of government bonds would not be able to deliver a trillion euro firepower as indicated earlier. Against this backdrop, for the first time in seven months ECB failed to fully offset the extra liquidity created by its bond purchases, reflecting eurozone banks’ reluctance to part with cash. Many investors perceived this as effectively a round of quantitative easing, more so since ECB’s balance sheet rose to a record €2.42 trillion through November 25, about €500 billion more than year ago. Some analysts, however, warn that the imbalance has to occur on a continued basis for it to be labelled as QE. The fact, however remains that if the situation repeats itself, ECB would either have to massively reduce bond purchases or openly recognise it as QE. We continue to focus on the downside for the euro and expect a test of 1.3170. Stability would only be secured above 1.3575.

Market Bias Index
Although the generalised perception of euro undervaluation has increased compared to yesterday both the USD and the EUR show a bias of less than two per cent.

Click here to read the full report:

http://www.easyforexnews.net/wp-content/uploads/2011/11/GDPBD00000200232.pdf

Deutsche Bank
Fixed Income Research – Global

EUR USD (1.3335) Even as banks, lawyers, brokers and big businesses prepare contingency plans for a possible eurozone breakup, the markets nevertheless seem to be pinning their hopes on the outcome of the ongoing EU Finance Ministers meeting. The expectations exist despite any confirmation of new sources of capital or policy options that would increase the clout of the rescue tools. It is the dramatic deterioration in the economic environment, which the markets hope will persuade the EU financial ministers to deliver a real jolt. However, even the politicians now concede that the new avatar of EFSF as a partial insurer of limited number of government bonds would not be able to deliver a trillion euro firepower as indicated earlier. Against this backdrop, for the first time in seven months ECB failed to fully offset the extra liquidity created by its bond purchases, reflecting eurozone banks’ reluctance to part with cash. Many investors perceived this as effectively a round of quantitative easing, more so since ECB’s balance sheet rose to a record €2.42 trillion through November 25, about €500 billion more than year ago. Some analysts, however, warn that the imbalance has to occur on a continued basis for it to be labelled as QE. The fact, however remains that if the situation repeats itself, ECB would either have to massively reduce bond purchases or openly recognise it as QE. We continue to focus on the downside for the euro and expect a test of 1.3170. Stability would only be secured above 1.3575.
Market Bias IndexT M
Although the generalised perception of euro undervaluation has increased compared to yesterday both the USD and the EUR show a bias of less than two per cent.