Euro Recovers From Early Session Weakness

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The EUR/USD recovered from an early session loss down to 1.2255, the weakest since July 2010. Early in the session the Euro was under slight pressure in follow-through selling after last week’s late decline.

Although there weren’t any blockbuster decisions released after today’s regional finance ministers’ meeting in Brussels to discuss the European debt crisis, the European Commission did manage to reverse the intraday course of the Euro when it said future capitalizations of banks by rescue funds wouldn’t require government guarantees.

There aren’t a lot of reasons for the Euro to rally at this time and the negatives certainly outweigh the positives. One reason is the poor outlook for growth. This morning,China reported a decline in inflation. This was further evidence that the European crisis was causing the global economy to falter.

Consumer prices in China only 2.2 percent in June from a year earlier. This was the slowest pace in 29 months for this important growth indicator, leading the Euro to weaken versus the Japanese Yen. 

Initially, the Euro fell versus the Dollar on worries that European finance ministers would fail in reaching a plan to stem the weakness in the Euro Zone. Spanish and Italian bonds fell as yields rose as investors expressed their concerns in the marketplace. Later in the session, these worries were quelled when news surfaced that the recapitalizations of banks by the European Stability Mechanism will not need a sovereign guarantee. 

Finally, European Central Bank President Mario Draghi reiterated his stance from last week that further interest rate cuts will depend on the data and economic environment. He also added that the ECB would “do everything to maintain price stability from both sides in the Euro area.”  This was no surprise as this is the ECB’s mandate. 

This morning’s news was enough to stabilize the Euro, but hardly enough to cause a bottom to form or the trend to change to up.

The GBP/USD is up slightly in light trading. Traders are focusing on the European finance ministers’ meeting and the release of the U.S. FOMC minutes on Wednesday. Technically, the Sterling is trading inside of a key retracement zone at 1.5522 to 1.5462. 

August Crude Oil futures opened higher in a continuation of last week’s strong finish. Traders are reacting to the inflation news from China and the general weakness in the U.S. Dollar. Speculators could be underpinning the market on the hopes that Iran’s tough talk against the European embargo will lead to something more significant, but there are no specific signs that this is a major concern today. Technical factors could be supporting crude oil since the main trend turned up on the charts a little more than a week ago.

August Gold is also trading better, but traders are going to have to decide whether this precious metal is an investment or a reserve currency. Investors have had a tendency to buy dips and sell rallies lately while those who perceive it as a reserve currency have been pressuring it when the Dollar rises. Today’s weaker Dollar is probably causing some light short-covering. 

Overall trading is light in three of the four major markets with crude oil being the most active. Volatility is likely to increase on Wednesday when the Fed releases its minutes from the June meeting. 

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About: FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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