Euro Trades Warily As All Eyes on Eu Summit

Last updated 2/10/2010 5:47 AM ET (GMT -5) 8 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Markets remain focused on EU Summit, await Fed testimony
• UK MP/IP much better but BoE Inflation report dovish
• Asia and Europe higher on return of risk appetite
• Oil at $73.40/bbl
• Gold at $1076/oz.

Overnight Eco

• AUD Westpac Consumer Sentiment -2.6% vs. 5.6%
• AUD Home Loans -5.5% vs. -4.8%
• JPY Core Machinery Orders big jumpt to 20.1% vs. 8.1%
• JPY CGPI -2.1% vs. -2.3%
• GBP Manufacturing Production 0.9% vs. 0.3%
• GBP Industrial Production 0.5% vs. 0.2%

Event Risk on Tap

• CAD Trade Balance expected at -0.1B
• USD Trade Balance expected at -35.7B

Price Action

• USD/JPY at 89.70 as risk flows offset by disappointing Chinese data
• AUD/USD at 87.70 in lackluster trade as eco data and Chinese news weigh
• GBP/USD loses the 1.5700 in the wake of dovish BOE report
• EUR/USD hovers near 1.3800 as markets await the resolution of Greek crisis

Currency markets continued to be on edge regarding the resolution of the Greek fiscal crisis with all eyes focused on the German Finance Ministry meeting ahead of the EU summit tomorrow. The German meeting ended with no official decision on the issue, but sources stated that they expect a statement to come tomorrow. The resolution of the Greek fiscal problem now centers on whether it will be a bilateral or a multilateral solution although at this point it appears a direct assistance package from Germany to Greece will be the most likely possibility.

As we noted yesterday pan European institutions do not have the flexibility to offer direct aid and yesterday the EIB confirmed that, "(its) Mission and Statute do not allow for bailouts in terms of budget deficits or balance-of-payments support to individual Member States." With onus now squarely centered on Germany, any aid package will have to pass the Bundestag by simple majority vote in order to go into effect and yesterday’s contradictory messages from a variety of German officials may be a reflection of the internal political debate on the matter.

Irrespective of the minute by minute maneuvering, tomorrow’s EU summit meeting now looms large in the market’s eye with sentiment clearly primed for some concrete resolution on the matter. Therefore, if the post summit announcement fails to provide definitive financial aid measures to Greece the market reaction is likely to be very negative with EUR/USD taking the brunt of the selling. As we’ve stated many times before, Greece is a minor economic actor but a major political problem for the EU and officials have clearly decided that they cannot afford to allow the markets drive Greek debt below investment grade levels for fears of contagion as other Southern European economies could face the same problem.

Meanwhile in UK the eco data surprised to the upside with Industrial Production and Manufacturing Production both beating estimates. MP rose to 0.9% against 0.3% forecast confirming the strong results of Manufacturing PMI a week earlier. The markets liked the data rallying the pound by 50 points in the aftermath of the release on the speculation that Q4 GDP may be revised higher. Cable however could face fresh pressure if the BOE Inflation report due 10:30 GMT proves to be dovish. UK price pressures especially on the wholesale level have risen alarmingly over the past several months and markets fear that a loose monetary policy from the BOE could result in spiraling inflation pressures despite the fact the UK economic performance remains lackluster at best.

In North America today, the focus will rest of Chairman Bernanke testimony to Congress, which because of the bad weather conditions will not be delivered in person. Still the markets will peruse the written statement carefully for hints of exit strategy from the ultra loose monetary conditions imposed in the wake of the financial crisis. We continue to believe that given the very gradual and uneven pace of US economic recovery, the Fed will remain cautious regarding any tightening measures and will not even consider the possibility of a rate hike until it sees three consecutive months of jobs growth. To that end today’s testimony is unlikely to offer any dramatic changes and the primary driver in FX will continue to be the ongoing Greek saga.

FX Upcoming

Comments (8)

bschlossberg

February 10, 2010 at 10:15 AM ET

Please keep all comments civil on this board. No cursing or insults please

Robertgill33

February 10, 2010 at 09:55 AM ET

Also, If they bail out Greece, they bail out every other EU country that runs into problems (PIIGS). Don't see a bailout without everyone else getting paid. So I don't see a bailout.

schultzz.at

February 10, 2010 at 08:24 AM ET

I am deeply worried about the longer term implications of any aid to Greece. If Germany guarantees some Greek loans that would not be a great deal.
But is Germany in a position to send money to Greece? The German deficit is projected at 6%/GDP in 2010. The government is struggling with the European Commission about the bad banks for WestLB ('assets': 85 bill. euro) and Hypo Real Estate ('assets': 210 bill. euro). Most banks are operating exclusively at the good grace of the government.
Even many automakers receive wage subsidies and the productivity gains of recent years have been wiped out.
Tom Schultz.

alexjbrandt

February 10, 2010 at 08:48 AM ET

Its like the blind leading the blind. I think the only institution capable of guaranteeing Greece debt without affecting itself too drastically is the ECB. But I doubt that the ECB will step up.

wwwin

February 10, 2010 at 11:48 AM ET

Well the price action indicates that the big boys think that there will be some sort of resolution tomorrow...so I am joining the big boys, with a SL @ 1.3643. So I either lose 57 or gain +200. As one blind man said to another, we shall see.

wwwin

February 10, 2010 at 12:11 PM ET

protests brought down...bid boys accumulating now...you will see, get in before its too late...going up up up now

silver

February 10, 2010 at 12:00 PM ET

How do you figure? 138.00 range down below the 137.00 point does not sound like the Big Boys are bailing out greece.

ric3bowl

February 10, 2010 at 01:38 PM ET

I'm with you on this potential short squeeze on the EUR..

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.