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by ForexNewsNow Team on December 17th, 2010

EUR/USD Consolidates Following Steep Losses on Wednesday

EUR/USD analysisOn Thursday, in quiet, uneventful trading, EUR/USD consolidated, following some steep losses on Wednesday. The losses on Wednesday were principally due to overall dollar strength, inspired by higher US bond yields, rather than by underlying euro weakness.

EUR/USD settled close to the recent lows (just above the 1.32 mark). The recent price action showed that in thin trading rather big market reaction occurred without much new information. However, on Wednesday a long list of economic data on both sides of the Atlantic was not able to move the pair away from previous close. The European PMI data were mixed with the manufacturing index coming out much stronger than expected at 56.8 (due to Germany), but the services indicator was below consensus. EUR/USD gained a few ticks after the publication of the release, but only very temporary.

In the US, the claims, the Q3 current account and the housing data were also too close to expectations to push EUR/USD out of the intraday 1.3210/1.3265 trading range. Traders were in a wait-and-see mode. The uncertainty on the outcome of the EU summit this time was a good excuse to stay on the sidelines. We don’t make a big issue of it, but in a recent past, this kind of uncertainty most often tended to cause additional euro losses. However, this was not the case this time.

At the 15.00 GMT, the European Central Bank announced it decided to increase its capital by EUR 5.0B. In the current market environment, investors could have taken this as a euro negative (does the ECB expect capital/credit losses at some point). Once again, there was no reaction in EUR/USD. It was only when the Philly Fed survey printed out stronger than expected that a move worth this name occurred.

The pair dropped from 1.3240 to about 1.3180, testing first important ST support levels. However, as no follow through selling occurred, short covering kicked in, allowing EUR/USD to erases the losses and close at 1.3243, even slightly above Wednesday’s
close at 1.3214.

EURUSD analysis Dec 17

The EU Heads of State and government leaders agreed to create a permanent financial safety net from 2013. They will insert two extra lines to the EU Treaty that apparently don’t need to be approved in referenda. The member states of the euro area may erect a stability mechanism that is activated if it is indispensable to guarantee the stability of the euro area. The decision need to be taken by unanimity. Both the condition of “indispensable” and unanimity seemed to be inserted on demand of Germany that wants to avoid countries asking for help too fast and have a final say on every decision. So, in fact it is only a broad agreement and now the hard work of agreeing a detailed European Stability Mechanism will be started, even if the Finance Minister already painted the broad outline.

Markets were maybe expected some more from the top, even if that was probably not the most likely outcome. Euro group chairman Juncker said the decision was taken not to enlarge or deepen the funding means of the EFSF (temporary crisis mechanism). However, the leaders said they were prepared to do whatever it takes to protect the euro.

There was little immediate reaction on the EUR/USD. In Asian trading, the pair moved higher currently near the 1.33 level, but we think the move the pair moved higher currently near the 1.33 level, but we think the move might be again more technical inspired than due to the outcome of the EU Summit. While we aren’t disappointed by the decision, which shows that Germany is still well on board. Indeed, they effectively dropped the initial no bail-out clause of the Maastricht Treaty, not a minor step for the country.

However, the ever impatient markets might be somewhat disappointed to the absence of additional measures. We’ll see the reaction of London traders soon, but think that the downside remains protected and soon attention will focus on other matters. Moody’s downgraded the Irish rating by 5 notches to Baa1 at the time of writing. We only expect some temporary negative euro reaction, mirroring what happened early when the Spanish rating was but on negative outlook. The rating action on Ireland shouldn’t come as a surprise.

EUR/USD Friday, December 17th

Today, the calendar of economic data is uneventful. The IFO business climate indicator is the exception to the rule. Recently, but since it is published after the PMI’s, the market moving potential of the IFO has diminished. The risks are for a stronger-than expected report.

Markets will continue to chew on the outcome of the EU Summit and eventual more comments of the leaders (see higher). Once the euro summit is digested, markets will probably shift to order-driven end of year trading with erratic price movements in thin market conditions.

Content provided by: KBC Bank

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