EU Crafts 750 Billion Euro Life Line, EURUSD Advance Likely to be Limited
The plan in turn fueled risk appetite, sending the euro to rise against all major currencies overnight. Meanwhile, the European Central Bank said it will counter “severe tensions” in “certain” markets by purchasing government and private debt. The emergency action illustrates several concerns; one in particular being that countries will have to agree to fiscal consolidation measures, which is likely to be negative for the euro in the medium term. Thus, as euro area countries battle high budget deficits, they must somehow come to a consensus as to how much of revenue should come from spending cuts or tax increases. However, despite the constructive efforts to prevent contagion, the nearly $1 trillion plan will likely not be enough to prevent contractions in some of the affected countries which are likely to cause a negative spillover effect onto other European countries. Looking ahead, investors are weighing in a zero percent chance that the European Central Bank will hike rates twenty five basis points at the their next interest rate decision on June 10th, according to Credit Suisse Global Overnight Index Swaps.
The euro reached an intraday high of 1.3093 against the U.S. dollar on the back of risk appetite, only to retrace most of its overnight gains as investors speculate that the rescue plan may not be enough prevent contagion.
The yield on Greek 10 year notes plunged 570 basis points to 6.71%, while the yield on Portugal’s and Ireland’s 10 year notes retreated 155 and 112 basis points respectively as investors returned their focus to the improving outlook for the global economy.
Taking a look at the ten year chart, the pair has recently broke below an 8 year rising trend, and we may continue to see downward pressure as our Speculative Sentiment Index signals for further losses in the pair.
Nonetheless, the euro may face added weight as markets may not be convinced that longer term inflationary measures will be contained. Also tapering today’s “positive” news was Moody’s announcing that it may cut Greece to junk in the next four weeks. Moreover, Portugal’s rating is also on review for a downgrade by the rating agency, while there remains no “significant” rating action “in the short run” for Ireland which has a negative outlook, Moody’s said today.
Written by Michael Wright, Currency Analyst
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