EUR/USD (1.3030) Four days after the conclusion of the latest summit, some EU leaders are beginning to raise doubts about what was actually agreed. At least, uncertainty around whether the debt and deficit rules were intended to apply only to eurozone countries or to the entire EU, has emerged. David Cameron did not mention the applicability of such rules to the UK as a reason for his veto – a stance that would probably have garnered more generalised support than his stated defence of safeguards for the City of London. This ambiguity raises questions about the feasibility of a 26-member intergovernmental agreement. For the markets, it also means that the post-summit perception of solidarity among, at least, 26 nations, has been undermined due to the risk of further vetoes. Risk aversion was also cranked up after yesterday’s Fed statements. The FOMC described financial market turbulence as an obstacle to a ‘moderately expanding’ US economy. There might have been some market hopes for a more active Fed, but these were dashed. Investors now expect only a serious risk of deflation or recession to move the Fed towards QE3. Thus, the US-dollar continued to rise and, despite what might have been some profit-taking on euro-shorts, the single-currency continued to fall to its lowest level since January. We now see the risk of a slide to 1.2900, possibly even to 1.2675. The new stability point is far away at 1.3415.
Market Bias Index
Against all the major currencies EUR is now perceived as more undervalued than yesterday, especially the EUR/USD whose breakeven level is currently at 1.3500.
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Deutsche Bank
Fixed Income Research – Global