EUR/USD (1.3885) The latest eurozone headlines suggest that the German model of a revamped EFSF which includes the insurance and guarantee functions may emerge as the eventual solution to the EU debt crisis. However, since the weekend negotiations failed to deliver any concrete solutions regarding the final form of the leveraged or enlarged EFSF, the French and German leaders attempted to shift market attention to the critical state of Italian public finances. They reiterate that Italy should deliver a detailed plan to curtail public debt in order to prevent further peripheral debt contagion. The €108 billion that the Europe’s big banks will be forced to find as fresh capital to withstand euro crisis during next six months will continue to weigh on the sentiment. Meanwhile the Fed member Janet Yellen suggested on Friday that securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for greater monetary accommodations. These new prospects for a possible new tranche of QE3 came earlier than anticipated by the market thus surprising many with long dollar positions. The dollar weakness across the currency pairs might support euro in a market that probably reflects a high number of medium term short positions.
The short-term outlook for the euro is quite encouraging and we credit it with the potential to rise to 1.4060.
Market Bias Index
The Market Bias Index confirms that the euro is not seen as having any intrinsic strength; across the board, the dollar is perceived as undervalued.
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Deutsche Bank
Fixed Income Research – Global