Euro Gains On Risk Appetite and Improved Confidence But Fails To Break Resistance

Talking Points
• Japanese Yen: Consolidating Above 89.00
• Pound: Sets Fresh Eight Day High
• Euro: German and French Consumer Confidence Improve
• US Dollar: FOMC Rate Decision On Tap

Euro Gains On Risk Appetite and Improved Confidence But Fails To Break Resistance

The euro broke above 1.3300 for a second day as increasing risk appetite and interest rate expectations lent support, but has reversed direction after running into resistance. Efforts by the U.S. government to help end the credit crisis has spark global optimism. Meanwhile, expectations for more easing from the ECB have dwindled with markets expecting the central bank to keep rate on hold at their next rate decision. The economic docket was light today with only German and French consumer confidence report crossing the wires. German sentiment was unchanged from the January’s revised reading of 22 as lower inflation has offset concerns over the banking system and economy. The French consumer outlook improved to the highest in nine months rising to -41 from -45. However, a survey of business demand fell to its lowest reading on record at -49.

Despite the improvement in confidence the reading still remain deep in negative territory and aren’t any cause to get too bullish on the euro. The ECB may not lower their benchmark rate at their next meeting as they try and assess the impact of their past efforts and the effects of fiscal stimulus plans by the various nations. However, the economic region continues to see countries receive lower debt ratings as Portugal, Spain, and Greece have already been downgraded. Fears are now that these countries will fall into bankruptcy which would shake the confidence of the entire region and cast doubts on the future of the currency. Therefore, traders may refrain from becoming too bullish on the single currency.

The British pound continued to march higher breaking above 1.4300 for the first time in eight days. The sterling has erased its losses following the banking troubles and the fear that followed that more bans would become nationalized. The sell off was probably overdone and now we are seeing a retrace aided by increasing risk appetite. The mortgage approvals release is the only event risk for the remainder of the week which could leave price action in the hands of the broader economic factors. Therefore, we could see the sterling continue to appreciate with a possible test of 1.4500.

Today’s FOMC rate decision today is the major event risk for the day as the central bank is expected to keep rates at 0.25%. The central bank doesn’t have anywhere to go but to zero and at this point it would be merely symbolic, as it would have very little impact on the markets. Traders will be focused on the post announcement comments from Chairman Ben Bernanke to get a sense if the aggressive easing to this point and if additional measures taken have had any significant impact on the credit markets and the economy. Today we may also get confirmation from the White House of the formation of a “bad bank” that will be headed by the FDIC. A bullish Bernanke and the prospect of toxic assets being removed from banks balance sheets may spark risk appetite and lead to dollar weakness.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com