The Euro Rallies into the EU Summit Weekend

The currency markets continued to favor riskier currencies moving into a weekend that could change the patch of riskier assets.  The EU summit will begin over the weekend and officials will discuss and make decisions on how to sure up banks and resolve investor haircuts.  Officials announced on Friday that determining how to create a new mechanism surrounding the bailout funds, known as the ESFS, will be pushed back until Wednesday.

This weekend’s first meeting is likely be the focus for currency traders on Monday.  The discussion will focus on a recapitalization plan for European banks which could range from 100-200 billion Euros.  Additionally, officials will likely address the size of the haircut on Greek government debt, with possible write-downs in the range of 40-60% for investors who hold this paper.

In [intlink id=”793″ type=”category”]economic news[/intlink], the German Ifo was encouraging to market participants.  The Ifo report declined in recent months along with manufacturing and business data survey in the US.   The recent months highlights that the financial crisis has severely impacted the real economy and the overall economic outlook and is threatening to push the euro zone into recession if officials don’t manage to get the situation under control soon.

Interest rate differentials have moved in favor of Germany as investor purchased peripheral debt and sold the German curve.  The two year sector moved near 12 basis points in favor of Germany over the US, making the Euro more attractive.

EUR/USD chart

The Euro rallied along with other riskier assets, but ran into resistance near the 50-day moving average near 1.3880.  A break will likely test former support which is now resistance near 1.4250.  Support is seen near the 10-day moving average near 1.3770.  Momentum continues to accelerate for the currency pair and is likely to continue if the EU meets market expectations.

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