Market movements have been somewhat confusing over the past two trading sessions.
On Friday we saw a pretty inconclusive EU Leaders summit where, as usual, we saw a lot of comment and “framework” but nothing much in the way of substance. The Euro sold off from its highs but there was nothing disorderly about the fall and it looked a far more technical correction than anything driven by economic developments.
Today so far we have seen a major obstacle to Spain’s request for bailout removed and the Euro has hardly rallied and in fact, looks to be on the back-foot this morning.
The regional election in Spain was something of a Triumph for Sr. Rajoy where he was able to actually improve his majority although Galicia is a traditional stronghold for his PP Party.
In Japan, where the currency has fallen continuously for the past week, Export data showed a continued weakness and brought further into question the likelihood of further monetary expansion.
In the U.K., inflation has been brought back under control which is a major testament to the MPC’s handling of monetary policy and it is likely that sterling can benefit from this confidence. A Speech by the BoE Governor tomorrow at 5.00 GMT sill be closely watched for any shift in policy.
The Euro is being driven by technical factors right now with support at 1.03020/1.2980 and resistance at 1.3070 and 1.3130.
Today there is very little to test those ranges for the single currency so a quiet day can be expected.
Tomorrow Spain will issue three and six month bills which given the mood of the market should be well received. Paradoxically this will possibly push back any request for a bailout as yields will be seen as continuing to fall.
There are clearly two very distinct schools of thought as far as the fate of the Euro is concerned and at the moment those looking at it positively are holding sway.
From the summit on Friday a new sense of patience pervades the market. Sr. Draghi is taking on an almost “Greenspan Lite” aura where the market hangs on every word.
His coup in sidestepping the Bundesbank is seen as a major tactical victory. It is too early to see him as the saviour of the single currency but gaining the confidence of the market is a major step in the right direction.