The Euro may be positioning for a long-term period of weakness after an initial advance as a consequence of a European Union bailout of debt-ridden Greece that is likely to be announced today following a summit of EU leaders in Brussels.
Key Overnight Developments[B]
• Australian Dollar Higher as Jobs Report Tops Expectations
• Euro Gains on US Dollar Amid Greek Bailout Speculation
[/B]Critical Levels
The Euro and the British Pound advanced 0.5% and 0.4% respectively against the US Dollar as risky assets traded higher amid speculation that EU policymakers will announce a rescue package to bail out debt-ridden Greece after a summit in Brussels today. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.
Asia Session Highlights
The Australian Dollar pushed higher against major currencies after a report from the Bureau of Statistics revealed that the economy added 52,700 jobs in January while the Unemployment Rate declined to 5.3%, the lowest in 11 months. Economists were calling for a gain of 15,000 and an increase in the jobless rate to 5.6%. The outcome boosted expectations that the Reserve Bank of Australia will resume raising interest rates after pausing hikes this month as firming economic recovery translates into rising inflationary pressure. A Credit Suisse gauge tracking traders’ priced-in RBA policy outlook for the next 12 months added 20 basis points as the data crossed the wires, with the probability of another 25bps increase in March doubling to 52% from 26% yesterday.
Euro Session: What to Expect
The release of the European Central Bank’s Monthly Report headlines scheduled event risk, but traders are unlikely to pay much heed to the economic calendar as the European Union meets to consider a rescue package for Greece as the southern European country grapples the largest public deficit in the region. Risky assets have enjoyed a sizable boost at the expense of the US Dollar and Japanese Yen since an article in yesterday’s Wall Street Journal suggested Germany was preparing to lead an EU effort to offer Greece loan guarantees to help quell jittery financial markets fearing a sovereign default within the Euro Zone. The meeting begins at 9:15 GMT with a final press conference scheduled for 15:45 GMT.
On balance, some sort of bailout is probable. From its inception, the European Union was always an arrangement grounded in geopolitical expediency rather than sound economics. Indeed, a plethora of economists have produced evidence over the years to show that even the original six western European nations that formed the common market did not have economies that were convergent enough to be unified into a single unit, which surely means that shakier countries like Greece were not even close. This means that, tough talk about fiscal discipline notwithstanding, the European Union does not see it as politically acceptable to allow an economic failure that would compromise the structural integrity of the regional bloc.
In practical terms, currency markets are likely to see a boost to risk appetite if a bailout is confirmed, with most major currencies returning to the offensive against the Dollar and Yen. This may be fairly short-lived however as traders consider the long-term implications of whatever course policymakers choose to follow – be it a lump-sum money transfer or loan guarantees, conditional or not. Indeed, a plan that amounts to a substantial increase in western Europe’s own debt obligations may plant the seeds for structural Euro weakness over the months and years ahead as governments issue bonds to finance their deficits. This promises to drive up long-term borrowing costs, making it more expensive for businesses to finance expansion as well as for consumers to take on large purchases, slowing the pace of economic growth and keeping short-term ECB interest rates at low levels for an extended period of time.
For real time news and analysis, please visit http://forexstream.dailyfx.com
To receive future articles by email, please contact Ilya at <[email protected]>