To start out the week, the euro was in a really strong position as promising comments last week from officials inspired confidence about resolution for the euro zone debit crisis. The high point was very temporary as the beginning of this week showed that the euro was on a downfall. All of the confidence in the area that traders had last week seemed to fizzle and disappear over the weekend- people are concerned that the meeting of the European Central Bank may not show the results needed to cause a rebound of the euro zone. If no progress is seen out of the ECB, this will be nothing short of devastating for the euro. For now, the euro is on a slight incline ahead of the ECB meeting, but the gains are essential a ‘hiccup’ and are not seen to be anything significant or long lasting.
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The euro rose against the dollar on Tuesday on month-end demand, but stayed below three-week highs on doubts the European Central Bank can meet market expectations of bold steps to combat the debt crisis.
Expectations that the ECB may lower interest rates in coming months saw the euro hit a record low against the higher-yielding Australian dollar. The Aussie was also buoyed by comments from Chinese premier Wen Jiabao that China would fine-tune policy to support economic growth.
The single currency rose 0.25 percent against the dollar to $1.2285, well below the high of $1.2390 hit last Friday. Traders said the euro moved higher due to buying by a sovereign investor in the euro/sterling currency pair, probably to meet month-end requirements.
That led to some to pare bets on euro weakness. Traders cited strong offers to sell the currency above $1.2300 while bids were layered below $1.2250 and stop losses at $1.2220.
Investors are focused on Thursday’s ECB policy meeting after bank chief Mario Draghi pledged last week to do whatever was necessary to preserve the euro. That raised expectations of a bold ECB response, a move that could boost the currency.
But investors are increasingly questioning how much the ECB can deliver, given euro zone paymaster Germany is opposed to the central bank buying government bonds in the secondary market and granting a banking licence to the bloc’s rescue fund.
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Our take…
The euro rose slightly against the dollar, but this is a common pattern towards the end of each month- it is still not close to the three week high it was at towards the ending of the week last week. Expectations about the ECB and what moves it will make are causing all sorts of turmoil in the forex market. Some think the central bank will cut interest rates for months to come and others are just outright skeptical that anything significant will come from the upcoming meeting.
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“There is a clear danger that expectations might be too high…He’s got to put his money where his mouth is, as there is a risk of disappointment around Thursday,” said Nick Parsons, head of markets strategy at nabCapital in London.
If the ECB does not signal further measures, the euro could fall back below $1.2130, he said, but a firm response could lift it above last week’s peak.
“After that you’d really be looking at $1.2693, the high on the last trading day of June, but we’d really need to see monetary shock and awe to take to us to those sorts of levels,” Parsons added.
Such “shock” is unlikely with most traders and analysts skeptical that a resumption of ECB bond-buying by itself would be enough to change the euro’s weak overall trend. Expectations of further ECB interest rate cuts would keep sentiment towards the currency negative, analysts said.
Earlier this month, the ECB cut its deposit rate, at which banks park excess funds with the bank, to zero, making the euro a funding currency for investors seeking higher yields.
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Our take…
This business of expectations about what the ECB has planned is making some traders very anxious. If the central bank doesn’t meet expectations and make further plans to save the euro zone, the euro is likely to fall below $1.2130. The ECB already cut deposit rates earlier this month and that makes the euro ideal for traders looking for higher yielding investments.
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The meeting of the ECB is coming up on Thursday of this week, what do you think the outcome will be?
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