Euro Reverses after Early Weakness; Trichet Comments Create Optimism

Friendly comments from European Central Bank President Trichet helped turn the Euro around after trading under pressure in Europe and Asia.

Friendly comments from European Central Bank President Trichet helped turn the Euro around after trading under pressure in Europe and Asia. The early session weakness was created by speculation that Greece was getting ready to default on its debt. Greek Bond and German Bund spreads have widened significantly this week indicating that traders were taking protection against the possibility of a collapse of the Greek financial system. Traders cited the implementation of austere financial measures as the main cause of the developing crisis.

The Euro began to stabilize close to the release of this morning’s ECB Policy Statement then began to rally once Trichet began to speak. During his monthly press conference, Trichet dismissed the prospect of a default by a financially strapped and debt-ridden Greece. Trichet then helped the Euro erase all of its earlier loss when he stated that the recently agreed upon financial plan designed to bail out Greece was a “workable statement”. He also said it represented a “serious commitment” to lead Greece out of its financial dilemma. He concluded his statement by saying default “is not an issue”.

His statement instilled confidence in some traders, forcing weaker traders to cover their short positions. Trichet tried to calm the markets by telling investors that if the European Union acts as one unit, it should be able to offer Greece a more favorable loan rate then the open market. Upon hearing this statement, the Bond/Bund spread began to narrow. This indicated that investors were buying what Trichet was preaching and a little confidence was restored to the market.

Although today’s rally was impressive, it did nothing to change the trend. Furthermore, the fundamentals continue to remain weak. Some bears insist that despite having the EU and International Monetary Fund backing, the recent fears of default have done nothing to reassure investor confidence that a viable solution can be worked out. Technically, it looks as if the Euro may have enough upside momentum to trade back to 1.3436.

The GBP USD finished higher and in a position to regain a key 50% level at 1.5297. Taking out this level will also trigger a breakout over a major downtrending Gann angle. Officially, the main trend will not turn up until the last main top at 1.5381 is violated.

Fundamentally, the turnaround in the Euro helped trigger Thursday’s short-covering rally. In addition, there may be some positioning evening ahead of the May 6th U.K. elections. Some traders are betting that there will be a majority winner in this election and that the possibility of a hung parliament will be diminished.

Shortly before the opening of the New York Forex Session, the Bank of England announced that interest rates would remain at near historically low levels. In addition, the BoE left its quantitative easing measures unchanged. Some traders felt that the central bank would either expand or extend this program. Analysts are now saying the BoE refrained from making any changes because of the upcoming election on May 6th.