EUR/USD (1.3555) An imaginative and hopeful market anticipating an imminent political solution to the eurozone debt crisis pushed the euro to a one-week high yesterday. But over the course of the day the brief optimism over the idea of the enlarged EFSF and the two-trillion euro figure disappeared as European politicians like German finance minister, Schauble, challenged even the concept of an SPV. With other German political hardliners similarly vocal, the euro and stock markets fell back again. Today, new doubts about Athens’ actual funding needs and the degree of unison among EU states on the bailout reached in July (Financial Times) may well further undermine the single-currency. Traders are likely left grappling with the feeling that as soon as financial markets pressure eases, the political will to press on with innovative solution disappears. On the interest rate front too, those who had priced in a 50bp rate cut for the next meeting received a cold shower as Trichet declined to pre-commit, reiterating that ECB policy rates intend to deliver price stability and anchor inflation expectations.
Early optimism on the euro led it, at least, into short-term stable territory yesterday. This opens the prospect of additional gains to 1.3690 or even to as high as 1.3815 before lower again. With this in mind, we would open a bearish strategy at 1.3755 with a risk-limit set at the higher of the above-mentioned points.
Market Bias Index
Bias has eased a little across the board, thanks largely to downward correction in the US, which is perceived as generously overvalued. The pattern of relative bias, however, remains unchanged.
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Deutsche Bank
Fixed Income Research – Global