by Cliff Wachtel, Global Markets

This week, it’s more like six categories of things to watch. Lots here of particular interest to EURUSD traders as well as those looking for an overview of the coming week.

See here for our full weekly EURUSD outlook.

Here’s a brief rundown of the balance of the longer term multi-week bullish and bearish forces. For details on all of them see our full report: MARKETS RALLYING HIGHER OR TRIPLE TOP? EVIDENCE PRO AND CON.

We’ll just review them briefly, and add some observations about how they apply for this week, and what events or reports this week could confirm or refute them.

Faceoff Between Bullish, Bearish Fundamental Trends Continues

1. Bullish Fundamentals

In addition to the monthly $85 bln in fed bond purchases, US economic data continues its uptrend. It moved markets last week, and as discussed below, looks primed to continue to do so.

US Data: US economic data continues to show slow but steady growth. The one thing we didn’t mention in the above referenced article is the US sequester, simply because thus far it’s not been a factor, as its actual effects (job losses, for example, don’t even hit until early April) have been negligible.

Recent highlights include continued improvement in employment, and more importantly, that is translating into solid consumer spending, despite a recent hike in payroll taxes.

2. USD Ramifications: A Big Story Brewing

One of the big ramifications with this is, as forex traders well know, these are the key metrics (as long as inflation remains within targeted levels) the Fed is watching for deciding when to begin tightening monetary policy. The Fed does seem to want to ease out of its ultra accommodative policy slowly, so if the US recovery continues, markets will continue to expect some kind of tightening move towards the end of 2013, even if it’s only verbal intervention.

Therefore if US data holds steady or improves, the USD may continue its recent positive correlation with the S&P 500 and other risk barometers, as we mentioned last week. That’s not because the USD is really becoming a risk currency, it can’t as long as it’s benchmark Fed funds rate remains low. However as long as bullish data feeds rate increase and tightening expectations (which support USD appreciation), we look for the USD to continue to benefit more from risk rallies.

Note however, that nothing in the above would impede the USD from ironically benefitting from its more customary safe haven role of the past years if we get a bout of market anxiety, be it from

• A normal and not unexpected pullback in risk assets from their decade highs (especially as most global data remains mixed)

• A new surge of EU concern, for reasons we discuss below.

Indeed, as long as EU data outside of Germany continues to deteriorate, the stark contrast between the US and EU should further support the continued EURUSD pullback. Ongoing political developments in Italy, which for markets have become a worst-case scenario, should continue to feed the EURUSD downtrend.

This week’s monthly FOMC meeting may provide some new information, though no big changes in policy are expected. Do note, however, that policymakers are just starting their terms. That’s the preferred time to hit electorates with anything painful, because then politicians have time to let voters forget or prepare new gifts to ingratiate themselves just before the next elections.

See here for our full weekly EURUSD outlook.

3. Technical Picture: Bearish Resistance Bending, Not Yet Broken By Bullish Momentum

As discussed in detail in MARKETS RALLYING HIGHER OR TRIPLE TOP? EVIDENCE PRO AND CON, the entrenched long term momentum continues to push against decade high resistance, indeed breaking it on the DJIA index. However we still haven’t gotten a decisive move higher. Markets seem to want to test this resistance, with or without the usual support of improving earnings or really meaningful improvements in data (not seen yet).

4. Bearish Fundamentals

As noted in the above mentioned article, these include:

• Contracting earnings
• Contracting economies in the EU, Japan, UK, and most developed economies outside of the US, Germany, (unless you already consider China and Korea fully developed economies).
• Italian political uncertainty that risks re-igniting EU fear. Last week we got a reminder of that potential from a weak Italian bond auction that set back European and US markets briefly. With elections coming later this year, German policy makers are not able to be too accommodating. Meanwhile, Italy has no coalition, and the momentum is with clearly anti-austerity/Brussels policies that scare markets. That’s a problem because all the EU has been able to offer is the appearance of calm and of reform (data outside of Germany has been showing continued deterioration or stagnation). As we mentioned in our 2013 forecast, EU crisis risk has been ignored in the bullish start to 2013. In the past, any real solvency concerns in the EU were enough to send markets falling.

5. Bearish Resistance

It’s been bent but not decisively broken, and won’t be until we have a sustained move above it. We should get our answer in the coming weeks. For what they’re worth, few 2013 forecasts saw markets moving much past current levels.

6. Calendar Events

Top events to watch this week include:

Tuesday

German ZEW economic sentiment: For reasons we can’t explain, as long as German data remains solid and there are not imminent solvency threats, markets have remained sanguine about the rest of Europe’s recession.

US building permits and housing starts

Wednesday

It’s all about the Fed. FOMC economic projections, statement, funds rate, press conference. No changes expected, but recent good jobs and spending news have markets sensitive to any hint of improving optimism among the FOMC. If they get it, the USD rally continues.

Thursday

Unless we get some big surprises from the FOMC, this is the likely big day of the week for scheduled events. These include a batch of Chinese, French, German and EU manufacturing and services PMI reports, including the US’s Philly Fed manufacturing index.

Friday

German Ifo business climate survey is the only top tier event.

As always, we remind readers that most central banks in the developed world, particularly the Fed, ECB, BoJ, and BoE are either actively engaged in policies that risk devaluing their currency and all that’s linked to it, or are at differing stages of moving in that direction. If you haven’t done so already, start diversifying your holdings into assets linked to healthier currencies. See here for details of one proven guide to simpler, safer ways to do that either as an active conservative trader or passive investor.

Diversify Your Assets By Currency As Well As Sector And Asset Class

Don’t get distracted by short term currency movements. As long as the folks at the Fed, ECB, BoJ and BoE believe want to cut the value of the USD, EUR, JPY, and GBP, then all of them are going to lose ground against both hard assets and better managed currencies. The same goes for any other currency subject to similar dilutive policies.

Anyone heavily exposed to these currencies will see their wealth dragged down with them. Just because you spend in that currency does not at all insulate you from the effects of a devalued currency (though I’m constantly amazed at how many bright people think otherwise). Just think about how many goods and services you buy either contain imported inputs or inputs that are subject to global prices.

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As always, we warn readers that just as any prudent investor diversifies into different asset and sector classes, so too they need to diversify their currency exposure. You don’t need to open brokerage accounts all over the world, or engage in high risk, complex forex trading. You do need to understand the range of safer, simpler, smarter ways to get that diversification. To help you with that, I’ve written the only collection of forex solutions for mainstream risk averse investors and traders, The Sensible Guide To Forex, Safer, Smarter Ways To Survive And Prosper From The Start.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.