EUR USD (1.2625) After a weekend of reflection following the EU summit, it is being claimed by many prominent commentators that Germany’s Chancellor managed to keep the overall liabilities for her country unchanged. For example, although the pan-European rescue vehicles now have the extra task of injecting equity into Spanish banks, their lending capacities remain limited. So although the summit was arguably a breakthrough in as far as the leaders signalled flexibility in terms of direct bank recapitalisation, or even the ambitious banking union concept, market participants seem to keen force it into the same mould of all the previous EU summits, i.e., beware of postmeeting ‘risk-on’ rallies, as the devil is always in the detail. Recently, post-EU summit rallies in the euro have been short-lived. This time, however, there is a major difference. We suspect that medium- and longer-term investors have actually sold their euro engagements, in the meantime, and no longer see the recovery as a chance to sell. This means the momentum the euro gained from last week’s downside false break may well propel it beyond the consolidation zone to the upside. We reckon that the euro should be able to overtake 1.2745 the upper border and have the potential to climb to 1.2840, the key level for further strength. To the downside, we peg initial support at 1.2510. Below the latter the euro will lose its momentum.
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Deutsche Bank