The Euro currency was higher last week against most of its commonly traded counterparts after increased optimism created by European finance officials. The main regional story of the week came from Germany’s official agreement to accept plans to be enacted by the European Central Bank (ECB) which will create economic stimulus for the Eurozone by buying government treasury bonds in some of the area’s most debt troubled countries.
The Euro is now trading at its highest levels in nearly six weeks (against the Japanese Yen) as investors look to buy the currency near its lowest levels of the year. The cause of the latest rally was seen as the German Chancellor (Merkel) showed support for ECB programs intended to help lower borrowing costs for areas such as Italy, Spain, Portugal and Greece as markets have been unwilling to buy heavily into treasury bonds auctioned off in these countries.
Official Policy Agreements Lift Market Sentiment
These latest developments out of Germany and the rest of the Eurozone have helped to inspire market optimism on a widespread level, as equity markets around the world saw gains for the week and high yielding currencies posted gains against safe have assets such as the US Dollar.
There were other significant currency stories in Australia as well, as the Australian Dollar broke this wider trend and posted losses against the US Dollar after the country’s central bank suggested that additional interest rate cuts remain a clear possibility into the end of this year.
But overall, the tone for the forex market was positive, as the Euro gained by more than 2 percent this week in the EUR/JPY. This currency pair is one of the most commonly used carry trade instruments and these currency pairs tend to make gains when markets are showing increased signs on stability. In these instances, investors are able to rely on gradual increases in exchange rates and capitalize on yield differentials against the Yen funding currency. But the moves in the Euro could be seen against the US Dollar as well, as the EUR/USD currency pair rose by nearly 0.5 percent on the week.
Looking ahead, market direction will be determined by external factors (namely, economic data out of the US), as there is little macro data that will be seen in the Eurozone. We will have German GDP figures, as well as PMI data out of Germany and the Eurozone as a whole, but this will not come until the end of the week. Look for US housing data to be the primary driver of prices earlier in the week.
Prices in the EUR/USD are seeing a strong rally on the short term charts, but from a longer term perspective, prices continue to be caught in a very clearly defined downtrend channel that started roughly a year ago. The key areas to watch can be seen in 1.2670, and a break here will signal that a major long term bottom is in place at the lows of this year.