EUR USD (1.2920) European Commission’s offer of a conditional delay of Spain’s 2013 deficit target if Madrid accepts new scrutiny about its plan to restructure banks and ensure more say in monitoring regional governments, reflects a compromising stance following the anti-austerity backlash that the eurozone elections produced. On the Greek front, latest poll shows that over 80 percent of the electorate would prefer a swift government formation instead of new elections. For the time being at least, the markets seem to be looking at coalition formation efforts in Greece with enough hope to hamper any panic reaction. In any case, the growth-austerity debate in the eurozone seems to be focussed on Germany’s willingness to tolerate higher inflation to boost competitiveness in the eurozone. Perhaps in a pre-emptive attempt to ward off opposition to the idea of a too accommodative Bundesbank, Weidmann reiterated that there is no danger that the two percent inflation in Germany will go out of control, even if it may be temporarily above the eurozone average. We reckon, that euro buyers with long-term perspective had so far prevented the euro from reflecting the popular market opinion about the currency. For long this prevented a plunge. Now it seems, the long term buyers are showing reluctance, at least for the time being and the euro is being exposed to more widespread scepticism. As before it remains vulnerable to a slide to 1.2805 or even to 1.2660. Only above 1.3095 will it get some relief.
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Deutsche Bank