A clash of the fundamentals is leading to a slightly weaker December Euro this morning. Overnight in Europe it was reported that the final purchasing managers index confirmed a contraction in the private-sector while August retail sales figures for the Euro Zone showed a worse-than-expected 0.3% decline.
This news took the wind out of the sail of Tuesday’s rally that was triggered when European finance ministers tossed around the idea of a European bailout similar to the TARP agreement that rescued U.S.banks during the height of the U.S.banking crisis.
On Tuesday, the idea to recapitalize Europe’s banks was beginning to catch on as the December Euro reversed earlier weakness on the daily chart to finish higher. Although the rally was most likely short-covering, it did show that the market will react positively to any news regarding recapitalization of the banking sector.
The acknowledgement that mistakes were made in the past and the fact that the finance ministers are acknowledging that there needs to be a coordinated effort to recapitalize the European financial institutions are seen as positives, however, a weakening economy may stall any plans because the money may have to be reallocated somewhere else later to stimulate growth. It could be the first sign that the governments are running out of money to same the financial markets.
The trade may begin to slow down today because of tomorrow’s European Central Bank meeting. Traders are speculating that the ECB will cut interest rates by as much as 50 basis points. In addition, there is talk that a liquidity measure may be introduced. This may be a plan to give financial institutions unlimited borrowing power so that they can resume lending to each other.
Technically the December Euro formed a daily closing price reversal on Tuesday. A trade through 1.3368 is needed to confirm the bottom. This could lead to an acceleration to the upside with 1.3413 to 1.3477 the minimum upside targets. The main trend will remain down on the daily chart until the top at 1.3684 is taken out.
