EUR USD (1.2515) With the Spanish government explicitly admitting that they will need help from European institutions to recapitalise the country’s banks, the eurozone crisis has yet again attained a new summit. The markets now expect an urgent short term solution to this development. But, probably because the scrutiny and conditionality attached to a full scale bailout, the Spanish are still reluctant to request it and are adhering instead to the idea of a banking union and direct recapitalisation of the banks from the rescue funds. While the German Chancellor had endorsed the idea of a common supervisory body for banks, the financial regulatory body, BaFin, has again reiterated their opposition to a full-fledged banking union without a fiscal union preceding it. The Parliamentary leadership of the ruling party in Germany and the government spokesperson have also explicitly turned down the idea of even a precautionary credit line through pan- European rescue vehicles. On the US front too, some Fed members have pointed out that the latest dismal jobs data does not really change the economic outlook. This implies that Fed may even lag the ECB in policy responses. In any case with the inflation outlook in the eurozone relatively benign, the ECB can at least cut rates based on its price stability mandate, with no reference to the crisis. Even if moderate in impact, such a move might soothe markets temporarily. Only beyond our 1.2535 hurdle would we enter a bullish strategy with 1.2785 as a price target and 1.2470 as risk limit.
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Deutsche Bank