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Merkel and Sarkozy meeting provides catalyst for strong euro rebound
Publication date: 20 June 2011
Author: Duncan Higgins, CaxtonFX
The single currency enjoyed a much stronger session on Friday, leaving the key EUR/USD pair flat after a very turbulent week. A meeting between German Chancellor Merkel and French President Nicolas Sarkozy proved the catalyst for a strong euro rebound on Friday. The two leaders effectively stressed that time was of the essence with regard to agreeing a second Greek bailout. With rumours surfacing that the resolution may have to wait until September, these were very welcome comments. However, reports of a delay to the next Greek aid tranche has erased much of the euro’s gains.
Today’s session brings no fundamental economic news. Market focus will be unchanged from recent weeks; attention will be firmly directed at Greece for clues as to progress.
After touching €1.1450 briefly, this pair finished flat on the week as sentiment improved towards the Greek situation. However, sterling has capitalised on euro-weakness this morning.
Consensus between Germany and France is going to be key to any prospective Greek resolution. The united front shown by Merkel and Sarkozy on the need to wrap this Greek situation up swiftly was understandably greeted with enthusiasm, and we saw a relief rally in the euro accordingly.
However, the euro has lost ground this morning on news that the next tranche of aid under the first bailout agreement will not be released until mid-July. After the encouraging comments from Merkel and Sarkozy, it is little wonder the euro has suffered since the weekend. This pair is currently trading at 1.1350, and should be well-supported for the day, particularly in the absence of any UK data (which has been consistently unhelpful to sterling for some time now).
Friday’s gains have been erased, with the US dollar benefiting from a softer euro and weaker US stocks.
The US dollar may have suffered from some poor consumer sentiment data on Friday, and there was also some unwelcome analysis from the IMF, which lowered the US economy’s growth forecasts. Today’s session brings no data to distract investors from the Greek issue.
This pair is currently trading above $1.61, with the euro’s poor morning weighing as usual. Sterling is likely to struggle again today with the dollar benefitting from risk averse flows, but this pair should find a little support at $1.61.
There was an element of short-covering on Friday, with investors possibly concerned with being caught offside by a surprise Greek agreement over the weekend.
The euro reached $1.43 on Friday, but has given away a cent this morning on the prospect of a delayed Greek resolution. Away from the Greek crisis, the U Federal Reserve’s monthly statement and press conference could be crucial to the longer-term outlook for not only the dollar and the single currency, but the forex market as a whole.
Bernanke may well signal an end to QEII, but interest rates are likely to remain ultra-low for an “extended period.” The market will be highly responsive to any surprise remarks from the Fed Chairman. For now though, this pair has dipped to the $1.42 benchmark, and could come under further pressure today.
This pair has made excellent gains this morning, with risk appetite hurt by the Greek deferral.
The aussie dollar remains sensitive to news from the eurozone and it has lost ground this morning accordingly. Commodities prices are also sliding, with some major funds speculating on a slowdown in global growth (and therefore demand for raw materials). This does the aussie outlook no favours as a commodity-linked currency.
The overnight session will be important for the aussie; the Reserve Bank of Australia’s minutes will be released and the market shall be watching closely for clues as to an Australian rate rise later this year. For today, the aussie is likely to remain under pressure from risk averse trading; it is currently trading above $1.53.
STERLING/NEW ZEALAND DOLLAR:
This pair lost almost two cents on Friday, but the kiwi dollar has lost significant ground this morning with risk appetite in decline.
Poor Asian stocks and a slide in commodity prices are reflective of the lack of investor confidence we are seeing this morning. The kiwi dollar has come under selling-pressure accordingly.
Appetite for riskier currencies is likely to be limited today, in the absence of some better news from the eurozone. Currently trading at the 2.00 benchmark, sterling may see some further gains today.
This pair is trading sideways, and has been for several sessions, despite further weak US economic data and question marks over US growth.
This pair has been trading within the 1.55-1.60 range for almost all of the year to date, and is showing no signs of an immediate move outside of this. In the current environment of sliding commodities, eurozone debt and concerns over global economic growth, a sustained break outside of this range to the upside seems most likely.
The loonie is likely to be responsive to the US equities market today, which could remain under pressure. This pair is currently trading at 1.5875.
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