Euro Moves Higher After Strong Economic Data

The euro is making some head way on the back declining risk aversion, bolstered by an upbeat employment report out of Germany, and strong euro zone CPI.

According to local authorities, German unemployment declined by 31k jobs in March, against expectations for a 7k increase and the deeper than the prior month’s 1k shortfall. The unemployment rate fell to 8.0% despite calls for no change to the unrevised 8.2% level, and the revised 8.1% rate from February.

Adding to the euro’s gains on Wednesday was a stronger than expected inflation report out of the euro zone earlier this morning.

According to Eurostat, the euro zone CPI estimate suggested a 1.5% annual inflation rate for March compared to calls for a 1.1% level and the prior month’s 0.9% rate.

The results increase the probability of an interest rate hike from the European Central Bank, a development which is positive for the European currency.

Also adding to the euro’s gains were comments from European Central Bank President Jean-Claude Trichet telling reporters in Stockholm that he expects Greek bond yields to decline, as market participants take into account the country’s debt reduction efforts. He added that he welcomes the expertise of the IMF in helping Greece tackle its budget problems.

The comments are good for the euro, in that if Trichet is right, the currency stands to regain some of its losses as bond yields increase in the euro zone, making investments in the region more attractive. Stay tuned.

EUR/USD last traded higher by 72 pips at 1.3485 after trading between 1.3385 to 1.3489 so far today. Short term support lies at 1.3268 and then 1.3247 from May 6, 2009, followed by 1.3213 from two days before that, while resistance is at 1.3569 followed by 1.3818.

Euro Claws Back Losses After ECB Agrees to Accept Greek Bonds

The euro is clawing back the day’s losses ahead of a critical European Union Summit in Brussels on Thursday, and is now in positive territory against the USD after the ECB offered an olive-branch to Greece.

Earlier this morning, ECB President Jean-Claude Trichet announced that the central bank will make loans against collateral graded as low as BBB-, but that the amount of loans obtained will be less that the higher AAA graded paper.

He added that interest rates remain “appropriate”.

Meanwhile, ahead of the EU summit in Brussels, German officials continued to reaffirm that aid to Greece must only come once the country fails to raise capital from the private sector.

Earlier this morning, EU Monetary and Economics Commissioner Olli Rehn told parliament that the EU Summit comes at a critical time for the euro zone, and that the monetary union must be defended. Regardless, all eyes and ears will be on the EU Summit, where a formal stance on the issue could be decided.

Speaking to reporters ahead of the start of the meetings Prime Minister George Papandreou is seeking support from the euro zone nations, so that the nation can raise the necessary capital to tackle its budget problems.

Also speaking at a press conference in Amsterdam earlier this morning, the central banker said a package led by the International Monetary Fund, and backed by member euro zone nations would be idea.

The comments go against the stance of European Central Bank Vice-President Jean-Claude Trichet, who has been pushing for a purely European solution, so as not to damage the credibility of the European Monetary Union.

In the overnight, and ahead of the EU summit in Brussels on Thursday, the euro declined to $1.3284USD, its worst level versus the greenback since May 7, 2009.

Nevertheless, with the ECB move resulting in Greek government bonds becoming less unattractive to investors, the euro has managed to recover, with EUR/USD last trader higher by 51 pips at 1.3366 after trading between 1.3284 and 1.3371 so far today.

Short term support lies at 1.3247 from May 6, 2009, and then 1.3213 from two days before that, while resistance is at 1.3569 followed by 1.3818.

Going forward, talk from the summit, is likely to be a hot topic for euro trader over the next several days. If the euro zone doesn’t come to the aid of Greece, expect the currency to decline further.

Euro Under Pressure As EU Summit Looms

The euro is under additional pressure on Monday with focus lying on the upcoming EU summit this week, where the fate of a European-led aid facility to Greece remains increasingly uncertain.

According to Deutchlandfunk over the weekend, German Chancellor Angela Merkel said she has made no decision on whether to support EU aid or to back an IMF solution for Greece.

The Chancellor warned of raising “false expectations” for a Greek solution at the March 25-26 EU Summit, pointing out that the issue isn’t on the agenda.

Reacting to the comments this morning, European Commission remains hopeful that an aid facility for Greece can be set up despite German opposition.

According to a statement released by the office of President Jose Manuel Barroso this morning, the President is “not disappointed” by comments made by German Chancellor Angela Merkel seeming to back away from aid to Greece over the weekend. Instead, the President says he remains hopeful that a solution can be agreed to in the coming days.

The EU summit is seen by traders as the key event where the fate of Greece will be decided. If an agreement to set up a facility is struck, expect the euro to regain some of its recent losses. On the other hand, failure for policymakers to reach an agreement could weaken the euro further.

The USD is broadly stronger on the back of the rising risk aversion, with Euro/USD down 0.16 cents to 1.3514, USD/CAD up 0.29 cents to 1.0202, USD/Yen up 0.04 points to 90.58, GBP/USD down 0.27 cents to 1.4986, and AUD/USD down 0.43 cents to 0.9111.

EUR/USD has traded in a range of 1.3498 to 1.3547 so far today. Short term support lies at 1.3500 and 1.3442. Resistance comes in at 1.3547 and 1.3586.

Euro Moves Higher As Finance Ministers Agree to Emergency Lending Facility

The euro has moved higher on Tuesday on the back of the completion of a broad framework for an emergency lending facility to euro zone nations facing budget problems.

In a statement released this morning, euro zone finance ministers were said to have reached an agreement over the “the technical modalities enabling a decision on coordinated action and which could be activated swiftly in the case of need … The objective would not be to provide financing at average Euro-zone interest rates, but to safeguard financial stability in the EUR area as a whole.”

After the meeting, Spanish Finance Minister Elena Salgado said that the time for nations to prepare their exit strategies is now, and that ministers had also agreed to budget guidelines for 2011. She made no mention of Spain’s potential difficulty I tackling its budget problems. All in all, the comments are neutral for FX.

According to Monetary and Economics Commissioner Olli Rehn, the EU’s economic recovery remains fragile, but should be self sustained by 2011.

Meanwhile, currency markets broadly ignored the days’ economic data. The German ZEW economic optimism index fell to 44.5 in March, better than calls for a decline to 43.5 from 45.1 the month prior. The current conditions index rose to -51.9, just further than calls for an increase to -52.0 from -54.9 the month prior.

Although technically a small positive for the currency, EUR/USD only experienced a modest pop.

Also, euro zone CPI rose 0.3% month-over-month in February, in line with calls and partially offsetting a 0.8% decline the month prior. Annual production was up 0.9%m in line with forecasts and priors.

Although the data were in line, they are also a confirmation of the CPI picture in the euro zone, with preliminary estimates already having been released.

On a side note, core CPI fell to a 0.8% annual growth rate compared to the prior 0.9% gain, its slowest pace on record.

Although the ECB cares more about headline CPI than core CPI, it suggests that rates in the EU could remain unchanged for some time, a development which would weigh on the currency.

The combined news has helped the euro sustain a modest rally against the USD, with EUR/USD higher by 49 pips at 1.3727. The pair has traded in a range of 1.3657 to 1.3704 so far today. Short term support lies at 1.3537 and 1.3531, with resistance at 1.3839 and then 1.4026.

Sterling Under Pressure On Warnings of Negative Quarter

Sterling is under sharp pressure on Monday after a BOE Board member warned of a possible slide in GDP.

In an interview with Western Morning News over the weekend, Bank of England Monetary Policy Board Member, Kate Barker said UK economic growth may contract once more, but will likely not fall back into recession. She explained that bad weather and an increase in the VAT are likely to hurt some of the increases in retail sales in the UK.

The comments were sour enough to overshadow some upbeat talk from a Moody’s analyst earlier this morning. In an interview with Reuters, Moody’s senior VP Kristin Lindow said that a hung parliament in the UK would likely take debt reduction measures, leaving the UK’s AAA rating intact, and that the UK remains a long way off from a change in outlook.

Indeed, much of the recent weakness in the pound has been attributed to the possibility that a minority government in the UK will not be able to achieve the necessary debt-reduction measures needed to maintain a AAA rating.

Nevertheless, focus in FX this morning continued to be on the dire situation in the UK, leaving GBP/USD lower by 146 pips at 1.5058 this morning after the pair traded in a range between 1.5021 and 1.5207 so far today. Short term resistance lies at 1.5575 with support at 1.4873 and 1.4784.

Mr. Papandreou Goes to Berlin

In Europe, all eyes are ears are on a visit from Greek Prime Minister George Papandreou to Berlin, where the lawmaker will seek the support of German Chancellor Angela Merkel.

Earlier this morning, in an interview with Frankfurter Allgemeine Zeitung, Papandreou said believes that if Berlin and the rest of the European Union agree to back Greece’s debt reduction program, it will help the nation raise the needed capital to finance its spending.

“We have not asked German taxpayers to pay for our pensions and holidays,” said the lawmaker. “That there is European support so that we can borrow money under better conditions. That is all we need."

Meanwhile Merkel is facing political pressure about backing Greece financially, a development which has put additional weight on the euro in recent days.

Elsewhere, the verbal support for Greece was strong with European Central Banker Mario Draghi telling reporters in Rome that the success of yesterday’s €5.0 billion bond auction demonstrates that Greece has convinced Europe of its sincerity to reduce its deficit, and in an interview with Deutschlandradio, Eurogroup President Jean-Claude Juncker said he doesn’t anticipate that Greece will require outside funding to correct its deficit, but that the nation has the full support of the European Union.

However the picture is not yet rosy. Greece’s €5.0 billion ten-year note auction may have been successful on Thursday, but an upcoming wave of debt sales from other euro zone nations may hinder the country’s ability to roll finance the rest of its deficit, according to an article in the Wall Street Journal on Friday.

Indeed, Greece’s ten-year note auction on Thursday was well bid, with the country raising €5.0 billion in the face of €14.5 billion in bids.

Nevertheless, the entire euro zone is looking to raise over €1.0 trillion in debt this year, paling in comparison to the €54 billion Greece needs to borrow to finance this year’s maturing debt and interest payments in Greece alone.

If demand for Greek debt appears to waver, expect another leg down in the euro as the fragile confidence from the last couple days gets shattered.

EUR/USD last traded flat at 1.3581 ahead of the nonfarm payrolls report in the U.S. So far today the pair has traded in a range of 1.3569 to 1.3607. Short term support lies at 1.3436 and 1.3424, with resistance at 1.3736 and then 1.3788.

Greek Austerity Package to Be Unveiled Wednesday

In the absence of any major economic news for the region, euro traders continued to focus on developments in Greece for direction.

According to Dow Jones Newswires, an unnamed European official said that an announcement for Greece to receive an austerity package worth €4.0 billion will likely be announced on Wednesday. Another official told the news agency that Greece is planning to raise €3.0 to €5.0 billion through the sale of a new ten-year note.

Meanwhile this morning, an EU spokesperson said that today’s talks have focused on Greece’s efforts to correct its budget imbalances and did not include a bailout plan for the beleaguered nation.

The debate is expected to come to a head on Friday, when Greece Prime Minister George Papandreou visits German Chancellor Angela Merkel to persuade her that the nation is doing everything necessary to correct its budget problems.

A bailout package for Greece is widely unpopular among French and German voters, and Greece is looking repair its battered image.

Meanwhile on Tuesday morning, EUR/USD appears to have given up some of its losses, last trading higher by 5 pips at 1.3566. So far today, the pair has traded in a range of 1.3436 to 1.3577. Short term support lies at 1.3424, with resistance at 1.3683.

If Greece manages to persuade the markets that its debt reduction plans are credible, look for the euro to bounce.