A eurozone finance ministers’ meeting in Brussels on Monday was highly awaited but failed to provide any market-moving news. The ministers were expected to discuss whether or not to increase the current €440 billion available under the European Financial Stability Facility (EFSF).

Comments made by German officials before the meeting were already pointing to limitations in the amount of loans the EFSF could provide. Germany seems to be aiming for a broader solution to the debt crisis.

On Monday the euro was lower against the USD, making daily lows of 1.3244 after Friday’s highs of 1.3456 – it seems that foreign exchange markets suspended their support for the euro as they awaited fresh news to sustain support for the single currency. The euro’s rise last week has been attributed to a correction of overly short euro positions taken prior to eurozone debt auctions and, given that at the end these were successfully concluded, investors had to engage in some correction of the prior bets against the euro.

Early Tuesday trading saw the EUR/USD currency pair re-attempting higher levels. The renewed support for the euro was being attributed to reported buying by sovereign entities and on media reports that Russia was supportive of eurozone debt. A stronger-than-expected German ZEW Economic Sentiment Index (a survey of economists and analysts on their expectations on the German economic health in the coming six-month period) also helped to lift the single currency. The euro gained against the USD as stop losses continued to trigger euro buys.

The euro is likely to remain weighed by the eurozone’s structural problems. Positive events, such as last week’s debt auctions, and pledges for support by China, Japan and now even Russia are short-term positives but only manage to induce a temporary easing for eurozone debt concerns.

The EUR/USD has been finding resistance in the 1.3417-1.3498 region since early December 2010 – so far that region continues to stop the euro’s rise against the greenback. Beyond this resistance the EUR/USD should be capped at 1.3569 (the 76.40 per cent retracement of November 22 highs and January 10 lows). To the downside 1.3220, 1.3086 (the 38.20 and 23.60 per cent retracements for November 22 highs and January 10 lows) and 1.2873 (January 10 lows).

Data released early Tuesday morning from the UK saw nationwide consumer confidence rising to 53 from a previous 45 – it was the first rise since August.

A CPI data print, also released Tuesday, from the United Kingdom, showed that CPI month on month reading for December rose to one per cent (compared to an expected 0.70 per cent) while the CPI year on year reading came out at 3.7 per cent (compared to an expected 3.39 per cent) – well above of the BoE’s targeted inflation rate.

Forex players are hyping speculation that persistent inflationary pressure will, in the end, translate in the BoE hiking its interest rates sooner than expected. While the British pound might initially benefit from the strong CPI reading, in the longer term it might become difficult to balance a weak economic growth on one side and a central bank adopting tightening measures to mop up excess liquidity on the other side.

Since the start of the year the British pound has been strengthening against the euro and also against the US Dollar rising 2.4 per cent and 1.93 per cent respectively.

Last Friday China surprised the markets when it raised the reserve ratio. China’s hike in the reserve ratio raises issues on possibly slower Asian demand coming ahead, and this left its mark on the AUD which was lower against the total of its major counterparts at the start of the week on concerns over its commodity-based exports.

As per expectations the Bank of Canada kept interest rates on hold at one per cent last Tuesday. Analysts are expecting the Canadian Dollar to outperform the Australian Dollar in 2011, based on the health of the Canadian domestic economy. In addition, the improving data coming out from the United States in general seems to portray an improved scenario for the US recovery and given Canada’s economic ties to the US this seems to give more scope for CAD strength.

At the time of writing the USD/CAD is trading lows of 0.9837; it is interesting to note that we last saw these levels back in May 2008. The 200-day moving average lies at 1.0257.

Upcoming FX Key events:
Today: German PPI, US Existing Home Sales
Tomorrow: French Business Climate Index, German IFO, UK and Canadian Retail Sales.

FX Technical Key points:
EUR/USD is bearish, target 1.2588, key reversal point 1.3500.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9500.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Muscat is senior trader at RTFX Ltd.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.