Jingling Nerves Could Produce Substantial Volatility

Since yesterday's re-opening, the majors rallied sharply against the USD following the UAE central bank’s urgent action to both restore faith and reduce fears following last week’s Dubai debt shock.

For instance, the EURUSD surged by over 100 pips to 1.5080 overnight(see diagram) whilst the GBPUSD produced a similar reaction hitting 1.6585.

However with market nerves still jingling, a resultant increase in risk aversion fuelled an USD rally as investors sought safe havens. Consequently, the EURUSD and GBPUSD have recently retracted to 1.5030 and 1.6590 respectively in the last hours.

Overnight, the Euro-zone posted a CPI increase of 0.6% for November, which is the first rise in seven months. As such, although the European Central Bank is expected to hold its interest rate at 1% later this week, market sentiment may begin to favor improved chances of a possible rate hike during the coming year.

Elsewhere, the UK registered a poor GfK Consumer Confidence Survey figure suggesting that UK households fear both further decreases in credit borrowing and increased worries about job security.

Today, the markets will, no doubt, focus on further developments concerning the Dubai situation as well as the possibilities of similar events occurring in the future.