By Russell Glaser
Despite the string of negative headlines coming from Europe, the EUR has firmed as a renewed discussion of eurobonds and the French/German/Greek conference call have markets responding in a positive way. The consolidation in the EUR may have some EUR shorts cutting their positions though price action is bearish in nature.
Yesterday European Commission President Jose Manuel Barroso stated that the Commission would soon be presenting options for eurobonds backed by all of the EMU nations up to 60% with the remaining amount backed by individual states using their respective credit ratings. The idea for jointly issued eurobonds found support this morning from ECB board member Yves Mersch. Dow Jones quoted him as saying that the creation of eurobonds for AAA rated nations would be “the embryo of a stability-oriented fiscal union with an agency for debt management, as is the case in larger countries.”
The introduction of eurobonds has the support of the peripheral nations but German Chancellor Angela Merkel said today it is, “absolutely wrong” for the creation of a eurobond. Also this month’s ruling by the German Constitutional Court forbids the Bundestag from assuming liabilities from other sovereign states. Given Germany’s opposition to eurobonds both from a political and legal standpoint, one must question how long the renewed eurobond chatter can support the EUR.
The Sarkozy/Merkel/Papandreou conference call also helped to support market sentiment with a joint statement affirming the nations’ commitment to “the Greek economy to return to a path of lasting and balanced growth,” as well as Papandreou determination to achieve Greece’s budget targets.
The statement also stressed Greece’s place belongs in the eurozone but the statement by no means nullifies comments from within Chancellor Merkel’s coalition from those who believe Greece should be expelled from the EU, nor does it prevent Greece taking unilateral action to leave the EUM should it default on its debt.
Looking at the technical picture, the EUR/USD continues to recover from its Monday morning low of 1.3500 and a break of 1.3800 would encounter resistance at 1.3835 followed by an initial retracement target of 1.3900. While the EUR temporarily recovers, the price action shows a distinct bearish flag pattern forming on the charts. Support from the chart pattern comes in at 1.3650 with additional support at the Monday low.