EUR/USD (1.3760) The formation of technocratic governments in Italy and Greece, and the improved prospect of the financial stability law being passed in Italy have more or less given the impression to the market that near-term the European crisis may still be contained.
Of course the concept of leveraged EFSF or the issue of ECB as a bank of last resort continue to be hotly debated among the EU officials But the market scrutiny has now shifted away from the dramatic Italian bond yields and towards the real prospects for global growth. With the November 23rd deadline approaching for the US super committee to reach a deal on deficit reduction both the Republicans and the Democrats would have to make hard choices on revenues as well as entitlements. In event of a deadlock, US would have imposed on them strict austerity measures to trim spending and this would seriously impact the growth outlook which was just beginning to look more encouraging. Markets would almost certainly prefer the semblance of growth-preserving deficit reduction in the US rather than across-the-board cuts. With most of Europe cranking up its austerity, Britain just at the outset and Japan not yet really started, investors are wondering from where the growth will come.
Although there was some late euro short-covering on Friday, until the single-currency overtakes 1.3875 we cannot consider it stable. Support has improved at 1.3615, though, ahead of 1.3360.
Market Bias Index
After what proved to be a brief excursion, the EUR/USD has returned to fair-value. Indeed, apart from the CHF and the GBP, all the major currency pairs are trading near their perceived fair-value.
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Deutsche Bank
Fixed Income Research – Global