With a date for an emergency EU leader’s summit finally set, the euro found some reprieve halting heavy losses suffered at the start of the week. The single currency took a breather late on Monday, during the US trading session, and continued recovering on Tuesday as forex investors eyed the important summit scheduled for today.
Eurozone leaders will try to finalise a second round of financial aid for Greece worth €110 billion during the emergency summit today. It remains to be seen how a deal will ultimately be reached as the European Central Bank through its President Jean-Claude Trichet continue to say “no” to both a credit event and a selective default of Greece. However, Nowotny the head of Austria’s national central bank and a member of the ECB’s governing council, said on Tuesday that a rescue package for Greece may involve a short-term default without catastrophic implications for the euro zone.
This was a first sign of a softening of its hard line by the ECB or any one of its members.
The euro started the week on the back foot, as a number of newspaper articles criticised the response by European authorities in tackling the debt crisis and expressed concern over the survival of the single currency itself. Meanwhile, Italian and Spanish bond yields continued to climb higher, increasing concern that the sovereign debt crisis could be worsening.
The European bank stress test passed largely without incident last Friday, with only eight banks out of 90, failing the tests, while the capital shortfall totalled €2.5 billion. However, the stress tests results failed to lift the euro and risk sentiment in general, as investors dubbed the tests as not tough enough.
The single currency had recovered from its earlier losses by Tuesday. It was up by a quarter per cent versus the dollar on the week, more than one per cent against the Swiss franc, 0.40 per cent versus sterling and around 0.15 per cent versus the yen.
The eurozone is not the only one battling troubling debt. Across the Atlantic, the United States also faces debt issues of its own. On Wednesday of last week, Moody’s put the US sovereign rating on review for a possible downgrade, citing lack of progress in the government’s negotiations over raising the debt ceiling. Standard & Poor’s followed suit less than 24 hours later, putting the US rating on negative watch, stating there was at least a one-in-two chance that it would lower its long-term credit rating.
The United States officially hit its debt ceiling, at $14.294 trillion on May 16 this year.
Forex traders are becoming increasingly aware of the existence of the US’ fiscal woes and are reluctant to take major positions on either side. As a result the EUR/USD has been relatively trapped over the last few weeks. During the last week, the pair has been confined between support by its 200-day moving average, now at 1.3914, and resistance, which until recently served as a key support, by its 100-day moving average at 1.4297.
EUR/USD had fallen to 1.4015 on Monday, but bounced up as it approached a key support level represented by the 61.8 per cent Fibonacci retracement, at 1.4008, of the move from a four-month low at 1.3837 to last week’s high at 1.4282.
RTFX TraderTip weekly scenario for EUR/USD suggests price action should hold above major support at 1.3644 before rising towards 1.4342.
The Swiss franc pulled back after starting the week hitting fresh all-time highs versus the euro and the dollar. Together with the yen, gold and silver, the swissie benefitted from forex investors seeking ‘safety’, as the debt crisis overwhelming Greece appeared to be spreading to larger European economies, such as Italy and Spain. The swissie has been pushed repeatedly to new highs versus the single currency during the last year and is currently up around seven per cent in 2011. Spot Gold (XAU/USD) also reached new highs at the start of the week. On Tuesday it had peaked at $1’610.10. XAU/USD is up more than 13 per cent since the start of the year.
Sterling suffered a similar fate as the euro at the beginning of the week; as it is becoming increasingly vulnerable to the euro zone debt crisis, especially due to concerns over UK banks’ exposure to the crisis.
The pound was relatively flat versus the greenback by the time of writing, down a quarter of a per cent versus the single currency and 0.15 per cent against the yen. It was up however versus the swissie, by almost one per cent. We expect the EUR/GBP to bounce back to 0.8858 after its move to 0.8705 at the start of the week, as suggested in the TraderTip’s weekly scenario. For GBP/USD the scenario calls for the current bounce to find resistance around 1.6165 – 1.6292, after which it should trade lower towards 1.5880.
Upcoming FX Key events:
Today: Eurozone PMI Flash Manufacturing and UK Retail Sales.
Tomorrow: German IFO, Canadian CPI and Retail Sales
FX technical key points:
EUR/USD is neutral.
EUR/GBP is bullish, target 0.9150, key reversal point 0.8700.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.7950, key reversal point 0.8750.
AUD/USD is bullish, target 1.1050, key reversal point 1.0450.
NZD/USD is bullish, target 0.8500, key reversal point 0.7840.
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Mr Xuereb is a trader at RTFX Ltd.