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Euro Slips as Euro-zone Summit Ends on Tense Note

Euro Slips as Euro-zone Summit Ends on Tense Note

2011-12-09 14:45:00
Christopher Vecchio, CFA, Sr. Currency Strategist

Fundamental Headlines

Euro Leaders Agree on Budget Rigor, Leave Next Step to ECB – Bloomberg

U.S. Trade Deficit Shrinks to Lowest this Year – Bloomberg

Wary European CEOs Move Cash to Germany – Bloomberg

Moody’s Cuts Three French Banks – Reuters

U.K. Veto of EU Plan Could Isolate Britain – WSJ

European Session Summary

Trade was choppy once again in the overnight, as the major currencies set their bottoms in the Asian session while rising to their highs in the European session. Headed into North American trading, the majors were positioned closer to their range bottoms, as the results from this week’s Euro-zone summit began to trickle out of Brussels and into the markets’ collective pool of knowledge.

On a first glance, the results of the Euro-zone summit are both encouraging and disappointing. On the plus side, leaders of all 17 Euro-zone countries plus 9 non-Euro-zone nations agreed to terms that allow strict caps on government spending and borrowing. Britain is the only country not to agree to the terms presented today. The Czech Republic, Hungary and Sweden, while initially holding out on the agreement, later agreed to changes on the condition that certain details of the pact need to be reviewed by their leaders and by their national parliaments.

Britain’s veto, given the way current treaties are structured, is enough to prevent changes to European Union treaties, as unanimity is required among the 27 European Union nations. British Prime Minister David Cameron was pushing for protections for London from future financial regulations; the veto may limit the impact the new agreements have.

EUR/USD 5-minute Chart: December 9, 2011

Euro_Slips_as_Euro-zone_Summit_Ends_on_Tense_Note_Franc_Top_Performer_body_Picture_10.png, Euro Slips as Euro-zone Summit Ends on Tense Note

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Like the reaction after the October summit, markets rallied upon the conclusion of the meeting. The EUR/USD rallied off its session low of 1.3280 to as high as 1.3431. At the time this report was written, the EUR/USD was trading at 1.3337, though was appreciating headed into North American trading. Similar price action was exhibited across the major currencies, which were rallying against the safe havens, the Japanese Yen, the Swiss Franc, and the U.S. Dollar. In fact, the Swiss Franc was the best performing currency on the day, a sign that European investors are still looking for safety despite whatever progress was made in Brussels this week.

If the Euro-zone remains under pressure, so too will the EUR/CHF. If the European Central Bank steps into the market and begins to aggressively buy Euro-zone bonds, the effect on the Euro will be similar to the effect the Federal Reserve’s quantitative easing program had on the U.S. Dollar: depreciation of the underlying currency (in this case, the Euro). Thus, downside pressure is expected on the EUR/CHF, which could provoke the Swiss National Bank to raise its currency floor from 1.2000 to 1.2500 or even 1.3000.

24-Hour Price Action

Euro_Slips_as_Euro-zone_Summit_Ends_on_Tense_Note_Franc_Top_Performer_body_x0000_i1027.png, Euro Slips as Euro-zone Summit Ends on Tense NoteEuro_Slips_as_Euro-zone_Summit_Ends_on_Tense_Note_Franc_Top_Performer_body_Picture_7.png, Euro Slips as Euro-zone Summit Ends on Tense Note

Key Levels: 14:05 GMT

Euro_Slips_as_Euro-zone_Summit_Ends_on_Tense_Note_Franc_Top_Performer_body_Picture_4.png, Euro Slips as Euro-zone Summit Ends on Tense Note

Thus far, on Friday, the Dow Jones FXCM Dollar Index is slightly higher, trading at 9911.17, at the time this report was written, after opening at 9898.00. The index has traded mostly higher, with the high at 9945.17 and the low at 9867.15.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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