The koruna weakened in the first days of the week, but has recovered and finally, its weekly performance is positive. As usual, the currency was mostly tracking the global markets but was also influenced by regional news.
Last week´s ECB meeting and the EU Summit brought a cautious optimism on markets, but it did not last longer than a couple of days. Then, skepticism prevailed about the EU´s ability to stem the debt crisis. All three major rating agencies warned that the Union still lacks decisive measures to solve the crisis and this puts the EU ratings under pressure. The loss of market confidence stood behind the fall of riskier assets at the beginning of the week. Moreover, Germany said that no expansion of the joint rescue fund was in the pipeline, the capacity should remain at EUR 500bn. It is considered negative because markets are not convinced that the fund is sufficient.
The Fed did not give markets any significant support as it stressed risks for the US economy and did not indicate further monetary easing. The Fed said that the economy expanded moderately and the labor market improved but it also mentioned market turmoil and the European crisis as risk factors. Despite these risks no further stimulus was indicated, which weighed on risk appetite but on the other hand, it helped the dollar.
The second part of the week was better and the demand for risk improved. Equities pared their losses and so did the euro, although in this case the correction was modest. Market sentiment improved on good soft indicators from the Eurozone and the US. The German and French PMI increased in December and beat expectations although they still remain below fifty points. The Philadelphia Fed Index as well as the Empire Manufacturing Index had already returned above zero and in December they rose more than expected.
The CE currencies benefited from the better risk appetite. Moreover, they were helped by news from Hungary. Hungarian government reached a deal with banks about sharing FX losses from mortgages. Hungary was also on good track towards a deal with the IMF and the EU about a credit line that would be activated in emergency situation. However, the negotiations have been interrupted, which weighed on the forint on Friday.
The Czech macro data did not have any impact on trading, which is no surprise. week, the Czech central bank will decide on rates. No change is expected as the bankers stand between the slowing economy and risk for growth on the one side and the elevated inflation and the weaker koruna on the other side. The monetary meeting should be neutral for trading.
On the major markets, there are the German Ifo Index and the US GDP (third release) on the agenda. Other releases that are scheduled should not be very important. European news still has big potential to influence market sentiment. We may learn more about the member states´ approach to their contribution to the IMF and about the fiscal compact. Moreover, Spain, Greece and France will sell short-term debt.