Uncertainty over EU Summit Outcome Leads to a Drop in Euro

By mosesbet · Filed Under Market News Comments Off on Uncertainty over EU Summit Outcome Leads to a Drop in Euro 

In the lead up to the EU summit, investors took a bearish stand against the euro anticipating drastic measures to ease the euro zone debt issue. The currency reached $1.3706 going down 0.4% nearing the lower level of this week’s range ($1.3650-$1.3900). With EU sources indicating a lack of consensus between the IMF and  the European Central Bank and the EU over Greek debt issue, and stressing increasing differences between European leaders, Euro further dropped to $1.3673, a session low. 

All eyes on European leaders

Investors seem to be trading on dips and bids of about $1.3620 with stops below $1.3650 were also cited. Inventor interest in assets that are typically considered risky was dampened with European leaders struggling to reach an agreement over the debt issue. On Wednesday, French President Nicolas Sarkozy confirmed that Berlin and Paris held different opinions on boosting the region’s bailout fund firepower, which was causing delay in the formulation and implementation of a definitive plan for the crisis. Hopes of immediate measures to control the issue were further dimmed as Angela Merkel, German Chancellor and Sarkozy refused to comment after their meeting, which was aimed to find a solution for the impasse. 

Investors turning risk averse

Societe Generale currency strategist Kit Juckes opined that once again the environment was that of risk aversion. Uncertainty over the outcome of the meeting had curbed the small covering rally noticed previously in the week. On Thursday, Spain and France debt auctions remained a point of focus among traders. Investors seemed to be particularly focused on the yield spread between German and French bonds.  

According to Moody’s, in case the budget was stretched too thin because of the cost of bailing out euro zone members and banks, France’s triple-A credit rating can be negatively affected over the next 3 months. With French and German leaders promising to come up with a comprehensive package for the debt crisis along with a strategy on recapitalization of banks by month end, the euro and risky assets have bounced in the last few weeks. Euro holding higher than $1.3650 indicates that some investors still believe that the EU summit and later G20 summit will result in some definitive solution for the crisis.

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