Euro lifted by European Central Bank hopes

With foreign exchange flows remaining very light at the start of the week, the euro was lifted by an air of optimism that meetings this week on Greece’s future and talk of decisive action by the European Central Bank to ease borrowing costs will lead to some significant progress in curbing the eurozone debt crisis. The single currency continued to benefit from short covering as forex investors squared their profitable short euro positions from the previous weeks.

Some positive data from the United States helped lift sentiment- Emman Xuereb

Another light economic docket this week should ensure that the focus remains on speculation about possible ECB action and on talks concerning Greece. Investors will also be anticipating the Jackson Hole Conference later this month and eyeing any hints ahead of Federal Reserve chairman Ben Bernanke’s speech. ECB president Mario Draghi is also expected to speak at the Jackson Hole Symposium on September 1.

Last week we saw some revival in investors’ appetite for risk. Global markets were lifted by hopes that world Central Banks will take steps to ease further monetary policy to spur global growth. Also some positive data from the United States, particularly building permits and the Michigan consumer sentiment both posting better than expected numbers, helped lift sentiment.

At the start of the week, stock markets and higher-yielding currencies looked like they would extend their gains, especially after German magazine Der Spiegel reported over the weekend that the ECB was considering setting a cap on eurozone sovereign yields. However the ECB refuted the report on Monday saying “it is absolutely misleading to report on decisions, which have not yet been taken, and also on individual views, which have not yet been discussed, by the ECB’s Governing Council”.

EUR/USD came under selling pressure ahead of the US session on Monday, weighed by the ECB’s dismissal of the German magazine’s report. The pair dropped to 1.2295 from 1.2369, also hurt by the Bundesbank’s August monthly report and by Germany’s continued reluctance to renegotiate Greece’s bailout terms. However the pair resumed its rise in the short-term on Tuesday, breaking above its two-week high by 1.2465, at the time of writing.

The Bundesbank, in its August monthly report, disappointed those hoping for an open-ended securities purchase programme by the ECB as it said that it views government bond purchases by the ECB “critically” as they entail “substantial stability policy risks”.

Greece also came back in focus at the start of the week as German Foreign Minister Westerwelle met his Greek counterpart Avramopoulos in Berlin on Monday. Westerwelle said that a decision whether or not to extend further aid to Greece will only be taken after the Troika submits its report in September, but rejected the possibility of a “substantial watering down” of Athens’ current bailout terms.

Avramopoulos pointed out that his government will soon present its new plans to cut budget deficits to meet the fiscal targets.

French President Francois Hollande and German Chancellor Angela Merkel are expected to meet today, ahead of Greek Prime Minister Antonis Samaras’ arrival in Berlin tomorrow for talks with Merkel.

Samaras is expected to push for a two-year extension of austerity measures to lighten their impact, and although France seems ready to soften its stance and reach a compromise, Samaras is unlikely to win any major concessions as Germany remains reluctant to re-open negotiations.

On Tuesday, the EUR/USD was again lifted by renewed talk of ECB intervention in debt markets, and British newspaper The Daily Telegraph said it could confirm the reports that the Central Bank was examining plans to cap Spanish and Italian yields. It rose to its highest level since President Draghi pledged he would do all it takes to preserve the euro when the pair rose to 1.2444, on August 6.

Technically, EUR/USD rose above a key resistance represented by its 50-day moving average and extended its gains to more than a one-month high. However, upside gains looked limited as an eventual ECB bond-buying programme will not happen before September and forex traders are awaiting the Jackson Hole conference and the next ECB policy meeting before committing heavily to buy the euro.

GBP/USD was also higher on Tuesday, rising to a three-week high by 1.5778 at the time of writing. USD/JPY held steady by 79.53, off a five-week high of 79.66 hit on Monday, as selling by Japanese exporters seen capping the currency for now.

The Aussie rose to 1.0518 against the greenback after Central Bank minutes published early on Tuesday showed policymakers believed the full impact of previous interest rate cuts had yet to be felt.

Upcoming FX key events
Today: EZ PMI, German GDP and US Markit PMI.
Tomorrow: UK GDP and US durable goods orders.

Technical key points
EUR/USD is bearish, target 1.2000, key reversal point 1.3000.
EUR/GBP is bearish, target 0.78 key reversal point 0.81.
USD/JPY is bearish, target 77.00, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

trading@rtfx.com

Mr Xuereb is a trader at RTFX Ltd.