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M$PC Currency Update: German Vote Sees Offers Bulls a Reprieve, But Will it Last?

Global markets took a collective sigh of relief today after the much contended vote to expand the European Financial Stability Fund passed in the German parliament . However more and more market participants have started to shift their focus from short-term liquidity problems to the more pressing growth and solvency issues plaguing the euro zone region. While today’s milestone looks to avert a imminent default and stem the threat of debt contagion, it does little to address the underlying systemic problems and lack of competitiveness facing periphery nations.

Investors now look to domestic data out of the US today with 2Q GDP, personal consumption, and pending home sales on tap. With concerns of a possible global slowdown taking root, traders will be closely eying the data as growth in the world’s largest economy show signs exhaustion. The dollar has been the primary beneficiary of these concerns over the past few weeks as massive swings in equity markets fueled haven flows into the reserve currency. As market participants struggle to deal with the surge in volatility, the dollar is likely to remain well supported as investors look to reduce risk holding amid the growing uncertainty.

We are likely to see some consolidation in the currency markets as higher yielding currencies pare some of the steep declines seen yesterday. However the longer-term outlook remains bearish for “risk” currencies as global growth prospects and the ongoing sovereign debt saga in Europe saps investor confidence, with an overwhelming demand for safety propping up the greenback and the yen.