The Euro finished lower on Wednesday. Now that creditconcerns in the Euro Zone have been taken care for the short-run, investors arebecoming worried about the possibility of a slow down in the economy.
The Euro finished lower on Wednesday. Now that creditconcerns in the Euro Zone have been taken care for the short-run, investors arebecoming worried about the possibility of a slow down in the economy. The sizeof the new bailout package is expected to have an impact on the Euro Zoneeconomy which may result in a double-dip recession.
The EUR USD was trading slightly better earlier in thetrading session. It seemed traders were starting to accept the fact that newmoney was coming into Greece,Portugal and Spain which washelping to shore up short-term liquidity problems. Furthermore, the news that Spain wastaking a proactive approach to contain its budget was being seen as a positive.
Overnight European Central Bank President Jean-ClaudeTrichet helped stabilize the Euro overnight by stating “I am more confidentthan ever in the future of the Euro.” He did issue a warning however, “We haveto strengthen oversight of budgetary policies adopted by this and thatcountry”. His statements were hardly earth shattering, but nonetheless kept newshort-sellers at bay. When pressed with the question about the ECB losing itsindependence, Trichet issued his strongest response, “We haven’t just startedprinting money”.
Short-term, the charts indicate the Euro is due for atechnical bounce to the upside, but longer-term the Euro still remains in thestrong hands of the short-sellers.
A dovish Bank of England outlook for U.K. growth andinflation pressured the British Pound all day. The BoE’s weak outlook negatedmost of the rally which took place on Tuesday following the establishment of anew government.
In the report released prior to the New York opening, BoE Governor Mervyn King warned that risks to growthhad increased and that the Euro Zone debt crisis had made it necessary for thenew U.K.government to speed up the process of developing a balanced budget. Furthermorehe added that interest rates would stay at a record low 0.50 percent for longerthan the markets had expected. He then added that inflation was forecast to bebelow its 2 percent target in two years.
King was supportive of the new government and looked forwardto working with it in an effort to turn the economy around while cutting thebudget and reducing the sovereign debt.
The short-term outlook is a little more positive for theBritish Pound. Downside momentum may slow now that a new government has beenestablished. Traders may celebrate the news that the Conservative party and theLiberal Democrats have formed a coalition to create a majority in theParliament by exploring the long-side or lightening up on bearish positions.The move by both parties helped to put an end to the long-standing rule ofPrime Minister Gordon Brown and the Labour Party.
The formation of a new government is seen as a positive forthe British Pound at this time because it provides clarity to an almost diresituation. For weeks the Sterlinghas succumbed to selling pressure due to the possibility of a hung parliament.This situation would have created a problem because it would have made itvirtually impossible for the new government to enact the austere fiscalmeasures needed to balance the budget and reduce the country’s debt.
The clarity provided by the “new coalition” between theConservatives and the Liberal Democrats comes at an important time because ofthe events taking place in the Euro Zone. The formation of a new governmentwill help to provide the psychological boost the British Pound needs to reversethe current down trend.
The USD CAD was under pressure most of the trading sessionand finished lower. Higher equity prices helped to boost the Canadian Dollar.Strong demand for the currency was also being driven by the bullish outlook forthe economy and the stability of the Canadian banking system.