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The US dollar retreated for a second week in a row, in anticipation of a victory of pro-bailout parties in Greece and for some central bank intervention. The Greek elections are a huge event that is expected to trigger extreme volatility, but it is not the only big one in a week that sees the G-20 summit and a closely watched rate decision in the US. Will global leaders and central bankers make dramatic announcements?  Here is an outlook on the market-movers that will shape forex trading this week.

The markets quickly saw the holes in the Spanish bailout announcement, and the initial rally didn’t last too long. The bigger elephant in the room, Italy, continues suffering from unsustainable bond yields. In the US, economic indicators continue disappointing:  lower than predicted retail sales figures, lower manufacturing, higher  jobless claims  which rose to 386K, Is this enough for QE3? Not really.

  1. Greek  elections:  Sunday, initial results expected in the evening, just before markets open. The second round of elections in Greece is one of the most important events for the whole continent and the whole world. The choice is clear: supporting the bailout and accompanying austerity measures and voting for the mainstream center-right New Democracy or voting for bailing out of the bailout and casting the vote for left wing SYRIZA, with its rising star Alexis Tsipras. Other parties seem to have weakened. The winning party gets an additional one sixth of seats, so if it wins one third of votes, an absolute majority is granted.  Polls are banned in the last two weeks before the vote, and recent figures showed the race is very close. A win for ND will lift the euro with a big Sunday gap, while a victory for SYRIZA will send it plunging. Another hung parliament,  (one of the 3 scenarios for the elections) will also be negative, as the country is already suffering from a “bank jog”, tax deferring, an energy crisis and also medicine is without reach for many. Only a third bailout with a different approach seems to be an option to keep Greece in the euro-zone. An exit from the zone is high on the cards with any result, yet a victory of SYRIZA will likely accelerate the process.  See how to trade the Grexit with EUR/USD.
  2. G20 Meetings: Mon-Tue. The next G20 meeting will be held in Los Cabos, Mexico where finance ministers and central bank governors coming from 19 states  will discuss global issues. However the central theme of this meeting will be the European debt crisis. The meeting starts a day after Greek elections which could decide whether the country stays in the euro zone. Brazil conditions its monetary contribution to the IMF Funding on having more power at the IMF. Voting power at the IMF is currently dominated by the United States and other developed powers. Leadership is badly needed.
  3. UK inflation data: Tuesday, 8:30. Consumer price inflation softened in April to 3.0%, the lowest level in more than two years, following 3.5% in March. Economists expected inflation to fall to 3.1%. This drop raises odds for further stimulus on the part of the BOE to boost the UK economy. Inflation rate is expected to remain 3.0% this time.
  4. German ZEW Economic Sentiment: Tuesday, 9:00. German and euro zone sentiment dived in May to 10.8 from 23.4 in April affected by the lingering crisis in Greece posing a threat to its existence within the EU. Such uncertainty hovers over other EU agreements raising worries concerning EU stability. Another plunge to 3.2 is expected now.
  5. US Building Permits: Tuesday, 12:30. The number building permits dropped in April to an adjusted rate of 715,000 lower than the upwardly revised March rate of 769,000. Economists expected a smaller drop to 730,000 new permits indicating a moderation in construction-related work. A small rise to 730,000 is predicted.
  6. British Employment Data: Wednesday, 8:30. The number of people claiming unemployment benefits plunged unexpectedly in April by 13,700 contrary to predictions of a 5000 increase. This drop follows a 5,400 decline in March indicating improvement in the UK job market. Another decrease of 3,200 in the number of  jobless claims is anticipated.
  7. US Rate decision: Wednesday, 16:30.  The FOMC may disappoint markets once again. While the economic situation in the US isn’t looking as good as earlier in the year, adding more monetary stimulus will do little to help: US yields are already very low. Long term interest rates aren’t what’s stopping the economy. Bernanke mentioned that returns on QE programs are “diminishing”.
    “Operation Twist” ends in June, and there is little chance that the program will be extended. If the FOMC does decide on this, it will probably be seen as a substitute for QE3, disappointing the markets even more.
    The only reason for some monetary stimulus would be the situation in Europe: the meeting is held after the Greek elections and while G-20 leaders meet. Bernanke could offer some kind of additional liquidity as part of a globally coordinated move. Nevertheless, QE3 has a very low probability.
  8. NZ GDP: Wednesday, 22:45. New economy expanded 0.3% in the fourth quarter of 2012 compared to the previous three months but lower than the 0.6% rise anticipated. This rise followed a 0.7% growth in the third quarter revised down from 0.8%. A growth of 0.4% is expected now.
  9. US Unemployment Claims: Thursday, 12:30. A disappointing rise of 6,000 in the number of Americans filing initial claims for unemployment benefits last week indicating the job market remains sluggish. The seasonally adjusted 386,000 claims is the highest in six weeks getting further away from the 375,000 line which indicates a stronger labor market. A decline to 381K is forecasted this week.
  10. US Existing Home Sales: Thursday, 14:00. Sales of  existing  U.S. homes increased in April 3.4% to 4.62 million yearly rate amid rising demand. This increase followed 4.47 million in March and was in line with expectations. The improvement in the US job market leads to rising confidence among consumers, ready to take on mortgages strengthening the housing market. A small decline to 4.59 million is predicted now.
  11. US Philly Fed Manufacturing Index: Thursday, 14:00. Manufacturing activity in Philadelphia plunged in May to -5.8 from8.5 in April. This is the first negative figure in more than eight months due to price declines and slowing employment, indicating a slowdown in the manufacturing sector. A small rise to 0.3 is anticipated.
  12.  German Ifo Business Climate: Friday, 8:00.  German business confidence declines more than predicted in May reaching 106.9 from 109.9 in April in light of growing concerns over euro zone’s debt crisis. Analysts had expected the index to decrease by 0.5 points to 109.4. A drop to 106.2   is expected this time.

*All times are GMT.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

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