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Forex.com Q2 2013 Markets Outlook: Buck up for the Mighty Buck!

Mar 22 2013
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Over the past month, we were able to report how various brokers did during last year and the beginning of this one. Forex.com, FXCM, Saxo Bank and many others had their say. But now it's time to have a look at what the future holds with the Q2 2013 Markets Outlook prepared by the Forex.com team of expert researchers.
 
 

What should we expect of global economy in Q2?

 
On the whole, Forex.com's research team expects economic growth worldwide to very small-scale and gradual. Key factors for any expansion at all will be found in the US, China and Japan, while the Eurozone and the UK slow everyone down. 
 
The US economy especially will be marching firmly toward improvement this quarter. Consumer confidence is getting stronger, and automatic spending cuts have helped ease the pain of the US budget somewhat. The Federal Reserve has been implementing policies to stimulate home sales and household balance. During the next quarter, the Fed is expected to continue with its accommodative monetary policy to support economic growth “at a moderate pace.” The Forex.com team believes we'll be seeing gradual improvement in the US throughout this quarter and, if a plan for fiscal consolidation is put forward, by the end of the year the economy will pick up speed and the GDP will increase
 
In China, things are looking up as well. Improved industrial production, retail sales, and manufacturing PMIs, along with an increasing trade surplus, all mean one thing: sustained growth in Chinese economy. The government's target for economic growth of 7.5% this year was confirmed by the People’s Bank of China (PboC), which has also stated that the yuan is now very close to equilibrium. 
 
Japan seems to have gone in recovery mode, after drastic measures taken by its government and central bank. A ¥10.3 trillion fiscal stimulus should do nicely to boost Japanese GDP by 2% by the end of the year. Together with an upsurge in business investment and confidence and a possible increase in consumption (due to an increase in sales tax planned for 2014), this should push economy in the land of the rising sun even higher.
 
Unfortunately, Europe will not be so lucky. Although the European Central Bank has been doing its best to improve financial conditions with its policies, Forex.com researchers say the recession is here to stay. The situation is not in the least improved by political difficulties in the Eurozone, like Italy's elections and governments inability (and lack of desire) to tighten their budgets.
 
 

What will the banks do in Q2?

 
So far, central banks have been doing the best to keep the Forex market happy, leading to low volatility and all-time highs in US stocks. For now, the Fed looks ready and willing to continue with the Quantitative Easing, and BoE may be thinking along the same lines. ECB is ready to take necessary action to assist struggling economies, and the Bank of Japan is preparing for a new government and course of policy.
 

1. US Federal Reserve 

Despite talks of ending QE in the US during the January FOMC meeting, Fed Governor Ben Bernanke made it very clear this month, that any such action will devastate the nation's economic outlook. As he said during a speech in San Francisco, ending QE now “could be quite costly and might well be counterproductive from the standpoint of promoting financial stability”. There are several reasons for this. First of all, unemployment is still far from the desired 6.5% rate. Second, it's still not clear what the Fed's strategy will be after its targets have been reached. According to the Forex.com team, the most likely scenario for now is for the Fed to keep up QE in Q2, continuing with a steady $85 billion of Treasury and MBS purchases per month. 
 

2. The ECB 

For the ECB, Q2 will mean a tightening of monetary policy, especially with both core and periphery economies showing extremely weak growth levels. As we saw in the past months, the biggest threat the ECB poses to the market lies not so much in its actions, but in President Mario Draghi's rhetoric. In February, for example, his press conference set off a downtrend in EURUSD, leaving the pair 700 pips lower in four weeks. Hopefully, there will be none of that this quarter. The Forex.com research team believes that if the euro climbs back to the high 1.30's again, the Bank may be spurred into action to cut deposit rates. Also, a LTRO 3 may be triggered by a sudden flare of sovereign concerns, threatening to drain liquidity from the financial system. Further falls in inflation could be the third factor to cause the ECB to take measures.  
 

3. The BOE 

No radical action is expected from the BoE until its new Governor, Mark Carney, gets settled into his new position. It is very likely that sometime in May the Bank will begin gradual QE, possibly GBP25 billion at a time. A raise of the current 2% inflation target or GDP target is possible, but also not until Carney is sitting comfortably in his chair at Threadneedle Street. As for the pound sterling,  more aggressive asset purchases could set UK's currency on a slippery slope toward 1.4000. 
 
 

So are we looking at a Eurozone crisis, take two?

 
Stability in the currency bloc is definitely getting shakier and shakier, as anyone who watches the news can tell you. However, over the past few years it has become apparent that flares in the European crisis have a tendency to “incubate” before they are felt on the market. Right now, Forex markets are calm, possibly because investors are used to European uncertainty by now.  Also, it looks like financial events will not be key factors to deepening of the crisis situation. Instead, social and political events have come into power – like Italy's elections, for instance. 
 
If the European crisis remains on hold during this quarter, this could prevent the ECB from taking any action and save its strength for a possible crisis flare in Q3. This will be good news for the single currency, as it could limit euro downside in the medium term. Forex.com advises to keep a sharp eye on the three countries that could be major factors to another surge in the European crisis:
 

1. Italy 

The situation in Italy is not looking good at all, and it is difficult to imagine it getting any better this quarter. The country's debt-to-GDP ratio has now climbed above 120%, the economy is deep in recession, and the Parliament cannot form a government. New elections are not very likely, since Presidential elections are coming up in April (and Presidential elections cannot take place until a new President is in sometime in May). So, it looks like a technocratic government is the likeliest option for Italy this quarter. Obviously, there is plenty to trigger risk aversion and the ECB’s OMT program. Otherwise, Forex.com believes the ECB will not be taking action towards Italy during Q2.
 

2. Cyprus 

Despite its diminutive size, Cyprus has seems likely to become the straw that broke the camel’s back. Right now, no bailout deal has been struck, despite market expectations. It's not very likely the EU will insist on the bailout being reduced by a one-time tax on deposits held at Cypriot banks, because this could easily lead to a massive withdrawal of funds in other European nations with shaky banking sectors. This in turn could cause instability and risk aversion throughout the currency bloc. So, a more likely possibility is that the German Bundestag will agree to release bailout funds. If it doesn't, Forex.com sees a surge in concerns about break-up risk, which could easily cause a sell-off in peripheral bond markets.  
 

3. France 

France seems also to be deteriorating of late. PMI surveys, French debt levels, unemployment rate and a diminishing car industry all seem to point to further contraction of the French industry. It looks like the government has no answers to these problems, and another credit rating downgrade seem very likely. All this could lead to worries whether France will be able to pay its commitments to Eurozone bailout funds, which in turn might set off even more sovereign risk in the Eurozone, Forex.com warns us. Luckily, this may not necessarily happen in Q2... but there is still H2 2013 to consider.
 
On the whole, the Forex.com research team is quite hopeful of Q2 2013. On a global scale, we'll be seeing some definite, though small, improvement. The pretty picture will be spoiled only by growing concerns and shakiness in the Eurozone. However, the US and Asia will continue to hold their own throughout the next three months. As for specific expectations for major currency pairs, please refer to the table below:
 
 
The complete Forex.com Q2 2013 Markets Outlook report can be found here
 
 

About GAIN Capital

 

GAIN Capital Holdings, Inc. (NYSE: GCAP) is a global provider of online trading services. GAIN’s innovative trading technology provides market access and highly automated trade execution services across multiple asset classes, including foreign exchange (Forex or FX), contracts for difference (CFDs) and exchange-based products, to a diverse client base of retail and institutional investors.
 
Through its retail brand, FOREX.com, the company provides retail traders around the world with access to a variety of global OTC financial markets, including Forex, precious metals and CFDs on commodities and indices. GAIN Capital also operates GTX, a fully independent FX ECN for hedge funds and institutions; OEC, an innovative online futures broker; and GAIN Securities, Inc. (member FINRA/SIPC) a licensed U.S. broker-dealer.
 
GAIN Capital and its affiliates have offices in New York City; Bedminster, New Jersey; London; Sydney; Hong Kong; Tokyo; Singapore; Beijing; and Seoul.
 
 
TAGS: forex.com  markets  outlook  markets outlook  q2 

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