Euro Persistence

Currencies Direct March 25th 2011 - 2 minute read

The Euros resistance to bad news has been remarkable. Recent
blows include the rejection of the Portuguese government’s austerity plan, a
likely hold-up in the attempt to  increase the size and scope of the EFSF EU
bailout fund, a fall in Eurozone PMI this month and finally a decision last
night to downgrade Portugal’ sovereign credit rating by Fitch and S&P. In
spite of all of this, and following touching a low of around EUR/USD 1.4054,
EUR has bounced back close to the 1.4200 level.

Further guidance will derive from the result of the EU
leaders’ summit today and the March German IFO business confidence survey. For
the former it is doubtful to be a conclusive result, with the hopefulness
following the unofficial March 11 leaders’ summit likely to provide further
delay due to internal strife over details. For the latter, a minor restraint in
the IFO is likely after February’s surprise high. However, there is a bigger threat
of a downside revelation following the weaker than forecast March German
manufacturing PMI. Alongside this background, EUR/USD is likely to resist to
break resistance around 1.4249.

Overall foreign exchange markets look somewhat more steady
and even the weight on the greenback appears to have temporarily lifted even though
a much weaker than anticipated result for US February durable goods orders
yesterday, which exposed a fall in both headline and ex-transportation sales. The
FX volatility measure has dropped sharply over recent days, led by short term
implied JPY volatility which has dropped close to pre-crisis levels. Lower
volatility has also likely reduced the likelihood of further FX involvement
although the key psychological level of USD/JPY 80 will continue to be well
defended.

US data
today is unlikely to offer much direction, with a slight upward revision to US
Q4 GDP and an unchanged outcome for the final reading of Michigan consumer confidence expected.

Report by Philip Ryan

Written by
Currencies Direct

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