Morning Foreign Currency Exchange Outlook - EUR/USD Rate Heads Lower as Market Remains Unconvinced by Eurozone Bail-Out Proposals and US Dollar Picks Up

28 Mar 2011 at 7 AM - Written by John Cameron

STORY LINK Morning Foreign Currency Exchange Outlook - EUR/USD Rate Heads Lower as Market Remains Unconvinced by Eurozone Bail-Out Proposals and US Dollar Picks Up

The Pound Euro exchange rate (GBP/EUR) is 1.1393. The Euro Dollar exchange rate (EUR/USD) is 1.4058.

The major development in currency markets on Friday was the agreement reached by the 17 EU Leaders in Brussels regarding the future Eurozone sovereign debt policy. At first glance, the accord appeared to be Euro-positive, with the European Financial Stability Fund (EFSF), being beefed-up. However, on closer inspection, many analysts expressed concerns that the increase in the EFSF’s powers offers a temporary patch-up until a permanent solution comes on-tap in 2013.

The permanent bail-out package will have considerably less funds at its disposal than had been under discussion, following Germany’s failure to commit the full amount of funds that had been proposed. In returned for it’s commitment to the new package, Germany has driven what I being labelled as a ‘Grand Bargain’ with other EU member states. In an attempt to appease the German electorate, this ‘Grand Bargain’ will mean that Germany has the ability to determine domestic economic policy in debt-troubled nations, heightening the potential or future political fissures in the Eurozone.

It is highly likely that the EFSF will be tapped for funds sooner rather than later, with Portugal’s debt problems mounting. Both Standard & Poor’s and Fitch downgraded Portuguese debt by two notches at the end of last week, following the voting-down of the latest austerity package in the Portuguese Parliament which led to the resignation of Prime Minister Socrates.

The markets did not react positively to the Brussels debt agreement when it emerged, with the EUR/USD rate trading down from near to its 14-month high just before Friday’s announcement to close down by over a cent. It seems possible that EUR/USD may now trend downwards for technical reasons following this rejection of a new high.

The fundamentals may further assist in re-enforcing this new EUR/USD downtrend with US income, expenditure and home sales figures due for release at the start of today’s North American session, ahead of Friday’s key Non-Farm Payrolls figure. A negative session for Asian equities overnight could lend further support to the Greenback, leading EUR/USD to once again break down through the key 1.4000 level.

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