The Confidence In The Single Currency Has Retreated Again

After a brief standing over 1.25 versus the greenback the single currency managed to fall again with increasing doubts about the outcome of the EU 2-day Summit in Brussels and its effectiveness in solving the EU debt crisis.  The Summit's ability to raise market confidence remains in doubt while the EU bond yields are still rising up hiking the borrowing costs in the EU indebted countries which are suffering in the same time from economic shrinking pressure because of the austerities measures which cap the governmental spending and hike the taxes.

The single currency is waiting now for the EU Summit which is expected to discuss using the EFSF funds for buying directly peripheral bonds of the indebted ailing governments inside the eurozone. Leaders have also noted that they will be citing new terms for reaching stronger EU banking and financial union which can open the way for issuance of the EU bond which is still refused by Germany.

After the results of the Spanish banking sector stress test had show a week ago that it can require from EUR 16b to 25b from the EFSF in the case of central scenario and from EUR 51b to 62b in the case of stronger pressure in adverse scenario. Moody's also lowered the credit rating of 28 Spanish banks in the beginning of this week. The EU finance ministers decided yesterday following a teleconference that it is important to underpin the Spanish banking sector releasing their plans to fund it from EUR 51b to 62b before the waited EU Summit from the current EFSF funds till the ESM taking place to start taking this role. The EU finance ministers were under pressure to take this decision for calming down the markets by bailing out the Spanish banking sector which effected negatively on the EU financial markets recently driving up the bond yields of the peripheral countries to its highest levels since the beginning of this year after the working of the first LTRO last December.

Market expectations of having crucial change come out of this summit has been already undermined this week by Egan-Jones's decision to lower the credit rating of Germany to A+ from –AA because of the risks of this crisis which threaten its banking sector and its holding of bonds from these debt-ridden countries.  German governmental contributions in shoring up these countries also negatively affects its creditability. While this assistance is still looking convincing in Germany for supporting the European financial markets and improving the credit conditions in the union which is useful for the German banking sector too by an indirect way.

While the single currency is still undermined versus the greenback as the interest rate outlook differential currently suggesting a close easing action by the ECB . This has come out also by the end of last week saying that it is planning for easing the current collateral conditions while the market is waiting now for new stimulating actions in the eurozone can be with the next ECB meeting next month after its president Mario Draghi has announced that the decision of keeping the interest rate unchanged at 1% earlier this month was not unanimously and there was voting favoring cutting of the interest rate. There are also claims that the ECB has lowered also its forecasts of growth to be from -0.5% to 0.3% in 2012 and to be from 0% to 2% in 2013 and also the inflation to be from 2.1% to 2.7% y/y in 2012. Growth is expected to fall below the 2% yearly target of the ECB in 2013 to be from 0.9% to 2.3% y/y inside the eurozone making a belief in that a decision of cutting the interest rate again can be a matter of time with the persisting of the dovish economic performance and the sack of liquidity for reviving it.

The single currency spent most of its trading time yesterday trading just below 1.25 level.  It is now losing confidence in the EU summit, and has fallen further reaching 1.2406, although is trying to stand above 1.24. In the case of falling further, it can meet another supporting level at 1.2357 before 1.2286 which could hold the pair decent after US nonfarm payrolls release of May. The breaking of it can lead again to 1.2151 which its breaking can open the way for 1.1876 again whereas the pair has rebounded forming its bottom on 7th of June 2010 which drove the pair later to reach 1.4939 on 4th of May 2011. Whereas the pair has managed to ease back again while the pair way up can be met by resisting level at level at 1.2748 again whereas it failed to continue rising versus the greenback in the beginning of last week and crossing above it can be met by a higher resistance at 1.2822 before the psychological level at 1.30 which its breaking can open the way for more resisting levels at 1.3063, 1.3180 and this can be followed by 1.3281 which its breaking can open the way to 1.3384 again before 1.3489 whereas it has formed its recent top and in the case of breaking 1.3489