Euro : 1.2550
The Euro stabilised on Friday, holding the 1.2520 support and squeezing up to 1.2582 as news emerged that the ECB is to relax its lending rules to allow banks greater access to funds and to ease liquidity in the markets. Whether this will have positive results remains to be seen, but the concern will be that the ECB is now going to allow banks to borrow funds by using assets as collateral that the ECB would not previously have accepted, and increases the possibility of a decline in the quality of its balance sheet and an increase in bad loans, with obvious repercussions for the Euro..
Elsewhere on Friday the leaders of Germany, France, Italy and Spain agreed to revive economic growth through a package of Eur 130 bio. The details of the Spanish banking bailout plan are due to be released once the Spanish government formally ask for assistance on Monday and the Euro will take early direction from the outcome of this.
Attention will then turn to the EU Leaders Conference on 28/29 June and Greece has already indicated that it wants an extra 2 years to meet the bailout deficit targets, as well as reversing the cuts in the minimum wage and the cancellation of planned civil service layoffs. Given that Angela Merkel has already laid out her cards, this could be a pretty tense affair. The new Greek PM will find it rather difficult to go home to Athens with no result, given that he has been elected on the basis of easing the bailout conditions. We have to wait and see how this unfolds, and before the summit takes place it could well be that the Euro chops around, with plenty of volatility but little direction.
On the other side of the Atlantic, a fair bit of US data is due over the week, none of which is expected to be particularly strong, so the US dollar will not have it all its own way and is likely to see some degree of weakness of its own, thus ensuring the odd short squeeze in the Euro. Be flexible.
Technically the Euro looks as though it may be fairly steady early in the week and 1.2500/1.2600 may well cover it early on Monday. The path of least resistance, right now looks to be mildly to the upside from a technical point of view, but I would not be overly enthusiastic about either direction early on, and suspect the best action is to stand aside and allow the market to work itself out.
On the downside a sustained break of 1.2520 would suggest a move to 1.2463 (61.8% of 1.2288/1.2743), 1.2400 (76.4%) and then possibly to 1.2380.
On the topside, as we expected on Friday, 1.2585 may continue to cap it, but beyond here would see an extension to 1.2635 and possibly 1.2670. I would not expect this on Monday.
In the longer term, 1.2520 looks to me to be fairly pivotal. It remains the neckline of the potentially bigger head and shoulders, and although we have spent a while above it, it continues to act as a magnet. It may well be that it continues to hold and that a greater rally is in line, that will further squeeze the shorts. However, if we can trade back below here for a few sessions, then I suspect we are on our way back to 1.2288, and possibly on to the 1.1875 target (June 2010 low). 1.2520 is an important level, so monitor it closely.
NB. A Sunday TV interview has seen German Finance Minister Scheuble tell Greece to stop asking for help and to start cutting budgets. The Greek PM and Finance Minister, for their part will not be present at the EU Summit meeting this week due to ill health. Not a good start!
Economic data this week includes:
M: US New Home Sales
T: China Leading Indicators, German Consumer Confidence, US Case Schiller Home Prices, US Consumer Confidence and Richmond Fed Mfg Index.
W: German CPI, US Durable Goods, Personal Consumption Expenditure
T: EU Meeting, German Unemployment US GDP
F: EU Meeting, China HSBC Mfg PMI, German Retail Sales.