Forex and Financial Market Weekly Outlook Jul 19 to Jul 24 2009

During last week's trading we all saw what kind of impact the earnings reports and the moves on the S&P and Dow Jones had on the currency, commodity, and bond markets... for the week ahead I expect to see the same exact themes play out as news, data, and fundamentals remain the witch's brew of choice for the big money market movers. 

Last week approximately 25% of earnings were released but over the next two weeks we get the other 75%, so do not expect any change in how those events act as the catalyst in the Forex market and Forex's correlated markets. Over-the-top earnings from the likes of Goldman Sachs, Intel, IBM, JP Morgan, and Bank of America led to a 7% gain on the S&P 500 and the Dow surging up 7.3%. The strong upside gains on the US and European equity markets sent crude oil up 6%, gold up over 2%, and Treasuries to their first decline in 6-weeks. 

Market participants sent their money-flows out of Treasuries and back into equities with measured conviction as we saw the yield on the 10-year note rocket up 34bps. In this weekly outlook I'm going a little more in-depth about Treasury yield curves, specifically between 2-year and 10-year notes, because the spread and yield curve between those two key debt issuances can often times reveal quite a bit about the overall risk appetite of market participants and how they gauge the potential for future growth of the US economy.

Last Thursday world famous market bear, Nouriel Roubini, gave participants yet another incentive to buy up equities and to sell the dollar and yen as he said the worst of the financial turmoil is behind us and he expects recovery by the end of the year. Although he did say another stimulus package would be required to combat the seemingly unstoppable rise in unemployment. 

So, is any of this real? Are the global financial markets really recovering and is everything really fixed? I personally do not think so, I believe another tsunami wave could hit the equity, commodity, and Forex markets later this quarter or in Q4, but it doesn't matter because in this game perception is the reality... the recovery is as real as the markets want it to be and make it out to be. The thing I have to constantly remind myself is, the markets can stay irrationally exuberant for an indeterminable amount of time. 

Fundamental events moving the Forex and equity markets this week:  

This week's fundamental and economic calendar is a little lighter than usual for US data but for European data there are a number of critical fundamental events that center on inflation, the consumer, production, and manufacturing. 

Bernanke testimony--

For the US dollar the bigger fundamental events take place on Tuesday and Wednesday as Fed Bernanke testifies before the House Financial Services Committee and Senate Banking Committee in DC. Bernanke's testimony will be on past, current, and future Fed monetary policy (interest rates), the state of the US economy, inflation/deflation, the housing and employment sectors, the deficit, sovereign debt monetization, future stimulus measures and the prospects of a sustainable recovery on Wall St.

All markets and all participants will be watching the Bernanke testimony and reacting accordingly. Remember, back in mid-March it was Bernanke who was one of the main catalysts that stopped the plunge in the equity markets, turned the S&P 500 higher and sent the dollar falling back off the throne it temporarily inhabited. Bernanke coined the stupid phrase, "green shoots", and the markets ran euphorically with it. Recent Fed rhetoric has been positive, upbeat, and the FOMC has upwardly revised their growth and inflation expectations.  

Not all the members on those congressional committees are buying into the idea of an instantaneous recovery, especially Ron Paul and Jim Bunning. What traders need to be watching is whether the overall sentiment of these testimonies is more on the positive side or on the negative side in terms of the future prospects of the US economy because the money-movers in the equity, commodity, and Forex markets will take their cue from Bernanke's messages to congress and how those congressional committees react. 

Key EUR/USD fundamentals--
German PPI (Monday 0200 EST)
Fed Lockhart speech (Monday 1330 EST)
Fed Bernanke testimony (Tuesday 1000 EST)
Eurozone Industrial New Orders (Wednesday 0500 EST)
Fed Bernanke testimony (Wednesday 1000 EST)
House Price Index (Wednesday 1000 EST)
Crude Inventories (Wednesday 1030 EST)
Initial Claims (Thursday 0830 EST)
Fed Tarullo speech (Thursday 0930 EST)
Existing Home Sales (Thursday 1030 EST)
German Manufacturing and Services PMI (Friday 0330 EST)
Eurozone Manufacturing and Services PMI (Friday 0400 EST)
German IFO (Friday 0400 EST)
Michigan Sentiment (Friday 0955 EST)