Trichet Comments Pressure Euro

Late session comments from European Central Bank President Jean-Claude Trichet turned the Euro negative on Thursday.

Late session comments from European Central Bank President Jean-Claude Trichet turned the Euro negative on Thursday. Trichet said that the International Monetary Fund shouldn’t take the responsibility of supporting weaker Euro Region nations away from the European Union. He was quoted as saying an IMF bailout would be “very, very bad”. Bringing in the IMF sends a message to the global financial community that the EU cannot take care of their own.

After trading sideway-to-better on earlier optimistic news stories, the Euro turned around late in the trading session to finish lower. Overnight, as investors awaited the start of the two-day European summit, the Euro received a boost from comments by Germany’s Merkel and a decision by the European Central Bank’s Trichet.

The Euro rebounded after German Chancellor Angela Merkel presented her aid package plan for cash-strapped and debt laden Greece. Short covering turned the Euro around after Merkel said she supports loans from the International Monetary Fund and other European nations as a last resort if all other means of support fail and the country faces default.

European Central Bank President Trichet also contributed to the turnaround in the Euro by extending the bank’s emergency lending rules. Earlier in the year, Trichet said the central bank would not ease its collateral policy for the sake of a single country. This action gave weaker shorts and excuse to pare their positions.

Although these actions helped to support the Euro early in the trading session, there was still no indication that a solid bottom was in place and that the trend was getting ready to turn higher. The EUR USD is likely to continue to trade under volatile conditions again on Friday as news from the European Union summit meeting is likely to leak throughout the day.

Today’s trading activity indicates that Merkel and Trichet are not on the same page when it comes to financial aid to Greece. There does appear to be room for compromise however, which these two heavyweights are likely to try to exploit. This may mean a favorable loan agreement with Greece is likely with aid from the IMF possible only in the case of default.

While all this is speculation, trader action was more definitive. Bearish traders continued their pressure on the Euro helping it to close on its low. Baring any major EU summit development overnight, look for support for the Euro to continue to erode.

The U.S. Dollar was under pressure most of the day against most major Forex markets with the exception of the Japanese Yen. Renewed interest in higher-yielding assets contributed to the weakness due to the possibility of a solution to the Greek fiscal situation. In addition, comments from Fed Chairman Bernanke weakened the Dollar a little when he reiterated the Fed’s conclusion that interest rates would remain low for a “prolonged period”. By the close, the Dollar had managed to finish higher versus the European currencies and the Japanese Yen while finishing lower against the commodity-linked Australian, New Zealand and Canadian Dollar.

The GBP USD could not hold on to earlier gains driven by a better U.K. retail sales report. The inability of the Euro to hold on to its gains spilled over to the British Pound which triggered an intra-day sell-off. The close on its low and downside momentum has this market in a position to drop further with a test of the March low at 1.4780 likely on Friday.

Strong crude oil, gold and equity markets helped pressure the USD CAD early in the session, but downside momentum slowed once this market could not penetrate a minor 50% retracement level at 1.0701. The subsequent short-covering rally helped this market recover late in the session, putting it in a position to rally further on Friday. A rally through the high from earlier in the week at 1.0281 indicates a move to the major 50% price at 1.0369 is possible. This is unlikely unless the Dollar/CAD gets help from weakness in crude oil, gold and equities.

The AUD USD closed unchanged after early intraday strength. The late session sell-off in the equity markets driven by risk fears out of Europe helped encourage the selling pressure. The weak close could trigger a further decline on Friday. The charts indicate that a major 50% price level at .8914 remains a viable downside target.