EUR/USD (1.3970) Nearly 11 hours of brinkmanship during the Wednesday’s EU summit saw a nervous market react to sketchy details in EU summit headlines and pull the euro down in the European session. The German Bundestag approved upping the lending capacity of EFSF to €1 trillion. Finally even the eurozone politicians agreed to a voluntary 50% haircut on Greek debt by private investors. The latter was evaluated with an appropriate dose of realism by the market which was left wondering if the final reduction of Greek debt to 120% of GDP by 2020 was indeed a satisfying outlook. Even the BoE’s Mervyn King concedes that the new measures are only intended to create some ‘breathing space’, the time necessary to solve the underlying problems. The NY close hence left the volatile euro at the same levels where it started the day in Europe. However, for the moment the market is left reassured that when pressed the European leaders can accomplish a compromise. The IMF role and the Chinese contribution to the bailout are also welcome factors. The market now has an impression that the recent gloomy European data (for instance the rising French unemployment) has probably convinced China that it is in its interest to support eurozone demand than to let its immense pile of foreign reserves sit idle.
We still see a potential for a rally to 1.4060 and beyond this to 1.4210. The first good support remains distant at 1.3780.
Market Bias Index
The Market Bias Index shows that the US dollar is increasingly perceived as undervalued. The euro in the wake of the EU summit is now largely seen as overvalued with the exception of the Australian dollar.
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Deutsche Bank
Fixed Income Research – Global