Euro Zone Leaders Reach Greece Aid Agreement

After falling to take out Thursday’s low, the EUR USD strengthen on the news that Euro Zone leaders agreed on a financial aid package for cash-strapped and debt-laden Greece.

After falling to take out Thursday’s low, the EUR USD strengthen on the news that Euro Zone leaders agreed on a financial aid package for cash-strapped and debt-laden Greece. In keeping with its mandate not to provide direct bailout aid to a European Union member, the EU nations agreed to provide approximately $30 billion in loans should Greece have problems borrowing money to service its high debt levels.

Although this news has triggered a short-covering rally in the Euro overnight, traders are approaching the news with caution. The initial reaction is that the deal could ease tensions and calm fears that Greece’s sovereign debt problems will spread to other Euro Zone nations. Most traders do believe that this deal is enough to stop the slide in the Euro, but not enough to turn the bearish trend around.

At Thursday’s New York session close, such a bailout deal looked pretty remote. The Euro was breaking into the close of the session, driven lower by comments from European Central Bank President Trichet saying that a bailout from the International Monetary Fund would be bad for the Euro. His feeling was that help from the IMF would make the EU look weak and unable to take care of its own financial problems. Going home after the U.S. close, traders felt that a deal was far from being made.

Traders became more optimistic about the prospects of a deal when a plan endorsed by France and Germany was agreed upon. The new deal calls for a mix of IMF and bilateral loans. Afterwards, Trichet embraced the proposal saying he was “extraordinarily happy that governments of the Euro area found out a workable solution.” His statement amounted to an about face from a statement earlier in the day when he said that an IMF role in the funding of a rescue plan for Greece would be “very, very bad”.

Trichet’s acceptance of the plan was mostly responsible for the overnight short-covering rally. His acceptance of the proposal helped ease concerns that Euro Zone officials would be unable to resolve the fiscal problems in Greece.

Whether a turnaround in the Euro today marks a major bottom is really up to the hedge funds at this time. Recent data suggests that hedge funds and large speculators remain net short the Euro in a big way. Until these large traders are forced to cover shorts or turn into buyers, expectations for a rally will be limited. The whole process of debating about financial aid for Greece has shaken investor confidence in the entire Euro Region.

Although the bailout news is triggering a short-covering rally overnight, the Euro has not yet even reached the old bottom at 1.3440. Regaining this price could trigger more short-covering, but unless this market finishes over last Friday’s close at 1.3529 to produce a weekly closing price reversal bottom, the EUR USD doesn’t look very strong yet.

The GBP USD is trading better overnight in a knee-jerk reaction to the overnight developments in the Euro Zone. The British Pound appears to have survived another attempt to drive it through the most recent bottom at 1.4780, but still remains in a solid downtrend. Shorts may lighten up a little on the overnight news, but nothing serious is expected to take place on the upside until the retracement zone at 1.5010 to 1.5080 is regained. The British Pound is still facing problems because of the expected “bumpy” recovery, political uncertainty and the threat of a credit rating downgrade.

The USD JPY is having a muted reaction to the news out of Europe. Overnight this pair is trading lower, but inside of yesterday’s range. Overbought conditions may be the cause of this reaction or the thought that this news only affects the Euro Region not the Asian markets. At the start this morning, traders will have to decide whether to test the old breakout level at 92.14 or make another drive toward the January top at 93.77.

As expected the USD CHF is feeling pressure overnight because of the rise in the Euro. The rally in the Euro is taking pressure off the Swiss National Bank to intervene to defend its currency and export markets. This recent rally stopped inside a retracement zone at 1.0703 to 1.0749 which is a normal resistance area. Further weakness today could trigger a decline to 1.0628 to 1.0600.

Despite the strength in the European currencies and a pick up in demand for gold, crude oil and equities, the USD CAD is trading higher. This market is seems to be setting up for a big move. Counter-trend traders want to see a rally to the major retracement zone at 1.0369 to 1.0442. On the downside, minor support has been established at 1.0170 to 1.0144. Today’s U.S. GDP report could be the catalyst which moves this market.

The AUD USD is failing to show a bullish reaction to the overnight strength in the equity markets. The chart indicates that this market may be headed toward a retracement zone at .8914 to .8834 before any significant buying surfaces.

Unlike the Aussie, the NZD USD is trading higher. Increased demand for riskier assets is helping to push this pair away from a support zone at .6992 to .6948 and toward an upside target at .7124. A strong surge in U.S. equity markets could trigger an even further rally to the upside.

Although the Euro Zone situation will be on the minds of traders throughout the day, this morning, U.S. GDP and Consumer Sentiment could be an early session catalyst. Economists are looking for GDP growth for the fourth quarter’s second estimate to be up 5.9%. The University of Michigan’s Consumer Sentiment Index is expected to come in at 73.0. A downward revision will reflect the negative attitude of consumers without jobs. In addition, higher gasoline prices may weigh on the index.