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EUR USD Showing Strength on Reports of Impending Greek Rescue

James Hyerczyk from ForexHound.com at 02/09/10


Appetite for risky assets is helping to drive down the U.S. Dollar at the mid-session. Profit-taking and fresh selling is apparent as investors adjust their portfolio positions in anticipation of a resolution to the sovereign debt problems in Greece and the neighboring Euro Region.

At this time, the resolution appears to be specifically designed for Greece. Investors are still skeptical as to whether similar problems in Portugal and Spain will get the same treatment. These concerns could be helping to limit today’s gains.

The EUR USD is trading sharply higher at the mid-session on the possibility that the Greek fiscal problems will be resolved in an orderly fashion. Investors are covering short positions aggressively in an effort to lock-up recent profits. In addition, new long positions are being entered as bullish traders anticipate the possibility the Euro will return to a more reasonable price level.

The GBP USD is mounting a strong recovery this afternoon after trading lower for several days while breaking key support levels. The gains in the Pound are most likely a relief rally, triggered by short-covering. Investors are still skeptical about the U.K. economy as well as sovereign debt issues of its own. U.K. traders are worried that its oversized budget deficit will encourage debt rating services to lower its credit quality.

Aggressive demand for higher yielding assets is helping to push the USD JPY higher. Traders have been lightening up safe haven positions in the Japanese Yen. Volatility is likely to be high once the announcement of the plan to shore up Greece’s finances is finally released. Long positions in the Yen and other Asian currencies have been building for several weeks because the current fiscal problems, driving these markets seems to be isolated in Europe.

Today’s Euro rally is taking the pressure off the Swiss National Bank to intervene on the Swiss Franc’s behalf. This is helping to weaken the USD CHF. The SNB will do anything to defend its currency against deflation and this includes applying intervention when necessary. As long as the Euro appreciates versus the Swiss Franc, the SNB will avoid using intervention as its main tool to maintain stability and order to this currency relationship.

Higher equities, gold and crude oil are helping to fuel demand for risky assets. This action is leading investors to step up demand for the Canadian Dollar while exerting pressure on the USD CAD. The charts are indicating this pair is likely to return to the middle of its “super range” at about 1.0550.

At the mid-session, the AUD USD and NZD USD are benefitting from renewed demand for the higher yielding assets. These two pairs have taken a beating lately as traders dumped asset-related currencies during the height of the Greek sovereign debt crisis. A return to more “normal” risk conditions is likely to benefit both markets. Technically, both of these markets posted closing price reversal bottoms on Friday. These potentially bullish patterns were confirmed overnight. The current patterns suggest a 2 to 3 day rally appears imminent.

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