FX Morning update - Euro slides back as EU leaders squabble

By Michael Hewson

Date: Friday 19 Mar 2010

Splits in Europe over an aid package for Greece are continuing to weigh on the Euro, as the markets misplaced optimism about some sort of bail-out package for Greece starts to ebb away. The reality is that any sort of bail-out for Greece, under present EU rules would probably be illegal, not withstanding the fact that political and legal considerations in Germany make any sort of support for any sort of cash bailout political suicide for Angela Merkel.
Greece has given the EU until the 25th March to come up with some form of package or guarantees, as it seeks to lower its borrowing costs, however it looks improbable that the IMF won’t have to get involved as attitudes start to harden in Berlin, and the splits that had always been bubbling under the surface, start to open ever wider between EU leaders.
As it happens the EU doesn't have the mechanisms in place to deal with sovereign problems of this magnitude, a fact acknowledged by German officials yesterday.

Speculation about a discount rate hike by the Federal Reserve last night also supported the dollar, which on the face of it would seem to go against the low rate stance espoused earlier this week by the FOMC. This however would not be the case, as any adjustment in the discount rate would have the effect of normalising the gap between the discount rate, and the fed funds rate that had existed before the credit crisis.
Historically the gap has always been much wider than it is now, and has been for the last 12-18 months and pushing the rate up again would be part of the Fed’s way of paring back on emergency stimulus measures.

The pound was also boosted yesterday 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. There is speculation amongst some analysts that this could give him some room for some eye-catching giveaways in next week’s budget. If this were the case sterling could well fall back towards the lows, given the markets anxiety about the level of the deficit.

EURUSD - the Euro continues to remain weak as the squabbling in Europe goes on. A 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. Now that we have traded through trend line support at 1.3640 the euro looks set to retest the key downside support which remains at 1.3485 on a daily close, a break of which opens up 1.3200.

GBPUSD - The pound was initially supported yesterday 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 1.5350 against the US dollar on these numbers, ahead of next weeks budget, but downside pressure will continue to persist while it stays below this line as well as 1.5420 initially. A sustained break below last weeks highs around the 1.5210/20 area could well open up a move towards trend line support from the 1.4780 lows which comes in at 1.4960/70.

EURGBP - the pound continues to benefit from the problems surrounding the Euro pushing the single currency lower as it tests 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 yesterday morning saw a brief push lower to the bottom of the cloud at 89.80, where we saw a sharp rally back towards the resistance and highs for the week in the 90.70/75 area. Any break here 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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