Euro Hanging Out For More QE

Includes: ERO
by: FXstreet

Euro traders are already in a wait-and-see mode ahead of the two-day FOMC meeting starting today. The single currency remains isolated waiting for the final statement due on Wednesday. It is worth noting that the general market consensus expects the Fed to announce outright purchases of Treasuries worth around $45 billion to be added to the current $40 billion monthly MBS purchases. Therefore, USD would come under pressure directly benefiting euro bulls. The extent of the subsequent rally in EUR/USD - only if the Fed does deliver - would strictly hinge on how much of it is already priced in by the markets.

The fiscal cliff debate in the U.S. has been quite silent as of late. Both Democrats and Republicans have strong wishes to leave this issue behind, but nothing in terms of compromise has recently shown up. Richard Yetsenga, analyst at ANZ, comments "A trigger of the "cliff" would result in few immediate tax or spending changes, but would dramatically escalate the political pressure to find a solution… The USD has been held up in recent years by aggressive deleveraging flows into the Treasury market… Our underlying premise is that as the global economy grinds to improvement, these flows will ease substantially, leaving the USD trading as a weak currency."

… Eyes on 1.3000 already

The recent news about anticipated Italian elections due to incumbent PM Mario Monti stepping down once the Parliament passes the 2013 budget has either been surprisingly quickly digested by markets… or ignored by markets, resulting in the euro appreciating further against the greenback, whilst common sense would have indicated exactly the opposite. What's more intriguing is that risk appetite swelled against a backdrop of rising borrowing costs in Italian debt markets first, spreading later to its Spanish peers. More bad news for Italy just followed, after the economic activity in the third quarter has contracted 2.4%, alongside a yearly drop of 6.2% out of the industrial output. In addition, the Italian benchmark plummeted and yields of the key 10-year bonds ticked higher.

In collaboration with this pre-FOMC rally, the key ZEW Survey both in Germany and the euro area has surprised to the upside in tandem with a very well received Spanish auction of 12m and 18m Letras, beating both the initial target of €3.5 billion and previous yields.

All in all, it appears that the table is set for another test of the psychological figure at 1.3000.

When it comes to technical analysis, Karen Jones at the German lender Commerzbank suggests "EUR/USD has held the initial test of the 1.2880 28th November low. We look for rebounds to now be contained by the 1.3021/235 end of October highs. We regard the 1.2880/76 support as exposed."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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