Euro Weaker as Merkel and Trichet Butt Heads |
The US dollar was off to a strong start this week as pressures in Europe have kept equities lower with banking stocks leading the plunge. Traders are expecting a report to show decreasing securities purchases of US securities but it could be the bond purchases from Europe that highlight the North American trading session.
The euro began the week lower with the EUR/USD being sold off the as forex trading began in New Zealand with the pair gapping lower but failing to break the 1.4000 level. Last week’s EU banking stress tests were mostly disregarded by financial markets given the criteria used was considered inadequate due to the yields for much of the periphery are trading at much higher levels than what was used in the stress tests.
A Financial Times article highlights the major roadblock to a resolution in the European debt crisis as German Prime Minister Angela Merkel and ECB President Jean-Claude-Trichet butt heads. Merkel wants investor participation in a new bailout agreement while Trichet opposes any plan that would bring a default rating on a nation’s sovereign debt. Trichet pledged to refuse to accept the debt of a nation in default in return for ECB liquidity provisions. This will likely be the driving theme as Thursday’s EU emergency summit draws near. Currently EUR/USD support is seen at 1.4000 and move below here would likely target last week’s low at 1.3840. To the upside the resistance line on the hourly chart that falls off of the June 14th high may contain and may offer better entry levels near 1.4150.
European woes dragged riskier assets lower with the London FTSE 100 down 1% with banking stocks leading the declines though the Nikkei 225 finished up by 0.4%. Spot crude oil was lower at $96.80 from $97.50. Spot gold continued to push higher as the commodity climbed to above the $1,600 psychological resistance level, highlighting the tension in the financial markets.
This afternoon the TIC long-term purchases report will be released and could continue to show further reserve diversification out of the dollar by central bank reserve managers, though this report may be overlooked by the ECB’s Securities Markets Program (SMP). Rumors of ECB bond buying were circulating as the ECB may have attempted to support the sovereign debt of both Italy and Spain. Last week Italian bonds came under pressure amidst contagion fears. Today Italian 10-year bonds are approaching the dangerous 6% level as the European debt crisis seems further than ever from being resolved.
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