Euro supported by hope

Hope appears to be the overriding sentiment filtering through markets at present. Such hope includes expectations that the European authorities will be able to ring fence Greece and avoid much deeper and wider comtagion to other eurozone peripheral countries than has already taken place. This may involve a European version of the US Troubled Asset Relief Program (TARP). Various other measures are being speculated on including covered bond purchases from the ECB, provision of 12 month liquidity by the ECB, a policy rate cut, banking sector recapitalization and a beefing up of the EFSF bailout fund.

The result of such speculation has been to provide some stability to the EUR and asset markets but there is a long way to go before hopes turn into action. The next few weeks will be critical to determine whether a firmer base to sentiment and the EUR can be established and markets will turn their attention to a meeting of eurozone finance ministers on October 3 and the European Central Bank on October 6. Meanwhile national votes on changes to the EFSF bailout fund will continue this week including Germany’s vote on Thursday. While the vote is likely to pass it may draw attention to divisions within Chancellor Merkel’s party.

One thing is certain. There is no room for any more disappointment especially given that the plans agreed by European officials in July have yet to be implemented. If there is no concrete action over coming weeks the EUR will come under renewed pressure and indeed the risk is still heavily skewed towards more EUR weakness given the various disagreements between officials. Nonetheless, the improved mood in the short term will likely help prevent the currency from sliding further for now and a base appears to be forming just under 1.35 against the USD.

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