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FX afternoon update - Euro lower on Greek confusion while sterling remains buoyant

By Michael Hewson

Date: Thursday 18 Mar 2010

FX afternoon update - Euro lower on Greek confusion while sterling remains buoyant

The Euro continues to be weighed down by uncertainty about whether there will be an EU bail-out of Greece, or whether the EU will back-stop any problems Greece has in meeting the austerity measures that it has promised to undertake to bring its budget back into balance. Rumours of a discount rate hike by the Federal Reserve have also been sweeping the market and this could well happen as early as this week.
This would in no way affect the low rate stance espoused earlier this week by the FOMC as it would be normalising the gap between the discount rate and the fed funds rate that had existed before the credit crunch.

At the crux of it appears to be the reluctance of the Greeks to pay a premium over similar German bond yields for servicing their debt. Unfortunately for Greece this is normal practice for risky debtors all over the world, and it seems that they want to be the exception.

Not surprisingly Germany has told them to take a hike, and it looks increasingly like the IMF may have to get involved as attitudes harden in Berlin after Merkel was criticised by French finance minister Lagarde over German surpluses exacerbating the problems in southern Europe.

The fact remains the EU doesn't have the mechanisms in place to deal with sovereign problems of this magnitude, notwithstanding any bail-out would be illegal under the terms of the Maastricht treaty and create moral hazard problems across the rest of the Euro zone.

The Greek prime minister has given the EU until 25th March to come up with some form of package to help them out and so the Mexican stand-off continues.

The pound was boosted today by better than expected public finance data which showed that the UK Chancellor may undershoot his forecasts of a £170bn deficit for the tax year 2009.

EURUSD - the Euro continues to remain weak as the squabbling in Europe goes on. move and close above 1.3800 is still needed to precipitate a move towards 1.4000. We should also keep an eye on the 50 day MA at 1.3870 if a break does occur as this could also stall any rally.
The market needs to break back above the resistance at 1.3710/20 to open up 1.3800 again. The trend line support from the lows around 1.3430, gave way this afternoon as we traded through 1.3640 and the market now looks for the key downside support which remains at 1.3485 on a daily close.

GBPUSD - The pound was initially supported today after the better than expected public finance data, however it was unable to get above 1.5330 to re-test the upper line resistance at around 1.5400 against the US dollar on these numbers, ahead of next weeks budget, but downside pressure will continue to persist while it stays below 1.5420 initially. Support should come in around the highs of last week around 1.5210/20 as well as trend line support from the 1.4780 lows which comes in at 1.4970/80.

EURGBP - the pound continues to benefit from the problems surrounding the Euro pushing the single currency lower as it looks to test support at 0.8920. A break of this support could well push the Euro back towards the 200 day moving average at 0.8850.

USDJPY - the break below the 90.20 level this morning saw a brief push lower to the bottom of the cloud at 89.80, where we saw a sharp rally and the dollar is now looking to re-test the 90.70/75 highs, a break of which could see a re-test of the March highs at 91.10/15 which is also trend line resistance from the January highs of 93.75. The 200 day moving average remains the key obstacle to further upside at 91.75.

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