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.