Euro Weakens As Bailout Fever Grips Europa From Iberia To Italia

Bailouts batter the euro

EUR/USD: As fear of sovereign debt contagion continues to grip the global markets, the euro is once again under pressure today. With bailouts already in place for Greece and Ireland, investors are now turning their attention toward Portugal and the rest of the peripheral countries. Even though government leaders in Lisbon are denying the need for outside aid, market participants are already planning for that eventuality as the same denials were heard from Greece and Ireland prior to their rescues. As borrowing costs not just in the smaller economic contributors, but also Spain, Italy and even France move higher, the stress on the system is almost palpable. For the moment anyway though, the euro is holding steady just above the psychologically important 1.3000 level after European Central Bank President Jean-Claude Trichet managed to temporarily soothe investors by indicating that bond holders may not face the stiff penalties suggested by German officials. As yields on sovereign debt and the cost of credit default swaps continue to rise though, it is hard to say for how long simple reassurances will be enough.

GBP/USD:? After dropping to a low around 1.5500 just before the opening of the U.S. markets, sterling has managed recover back to the level it started the week.

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There were no major economic releases out of the U.K. today, but with the focus moving away from Ireland’s debt in which Britain’s banks have a very large stake and toward Portugal, Italy and Spain, the pound has received a bit of a reprieve. While concerns of debt contagion are still flaring which could cause some risk aversion and thus a cap on the upward potential for the pound, at least there has been a bit of breathing room created. As we move toward the later part of the US trading day, it would not be a surprise to see the price action in this pair settle down as traders start looking forward to some very important economic announcements out of the UK tomorrow. Those releases include the Nationwide and Halifax House Price Indexes as well as Manufacturing PMI data. Any of these reports has the ability to move markets, but it is still altogether likely that the focus will remain squarely on Europe and that is where market participants will be looking to take their clues on market direction.

USD/JPY: After posting virtually uninterrupted gains against the yen since November 23rd, the dollar corrected substantially over the last 24 hours, falling 100 pips back to 83.40 before finding some temporary support. Since dropping to 83.40 though, it has been a very volatile trade between these two currencies as mixed US economic data pulled and pushed the price of this pair up and down. The S&P Case-Shiller House Price Index was dollar negative, posting only half the expected growth rate with a reading of 0.6%. This report was offset on the dollar positive side though, with both the Chicago PMI and the Conference Board’s Consumer Confidence readings besting expectations. For now, this pair is struggling to find direction and has started to move sideways. Interestingly, if support does hold at the 83.40 level, it would stay very consistent with the three previous 100 or so pip pull backs seen in this pair since the uptrend began November 1st.

AUD/USD:? The downtrend in this pair is still intact with lower highs and lower lows being made, but the momentum seen last week has slowed considerably. The events in Europe have certainly played a role in the recent Aussie weakness; however, the somewhat moderate impact on commodity prices as well as the slight exposure Australia has to European debt have kept the slide in check. What will likely have a much larger impact on the AUD/USD trade are two reports due out later today (U.S.)/tomorrow morning (in Australia). Traders of this pair will certainly want to pay close attention to the quarter-over-quarter Australian GDP figures, but probably just as important will be the Chinese Manufacturing PMI data. If earlier tightening policies implemented in China have slowed their manufacturing rate, the AUD may see some weakness as China is one of the main recipients of Australian exports.

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