The Euro finished lower on Wednesday. Now that credit concerns in the Euro Zone have been taken care for the short-run, investors are becoming worried about the possibility of a slowdown in the economy. The size of the new bailout package is expected to have an impact on the Euro Zone economy which could result in a double-dip recession.
The EUR USD was trading slightly better earlier in the trading session. It seemed traders were starting to accept the fact that new money was coming into Greece, Portugal and Spain which was helping to shore up short-term liquidity problems. Furthermore, the news that Spain was taking a proactive approach to contain its budget was being seen as a positive.
Overnight European Central Bank President Jean-Claude Trichet helped stabilize the Euro overnight by stating “I am more confident than ever in the future of the Euro.” He did issue a warning however: “We have to strengthen oversight of budgetary policies adopted by this and that country.” His statements were hardly earth shattering, but nonetheless kept new short-sellers at bay. When pressed with the question about the ECB losing its independence, Trichet issued his strongest response, “We haven’t just started printing money.”
Short-term, the charts indicate that the Euro is due for a technical bounce to the upside, but longer-term the Euro still remains in the strong hands of the short-sellers.
A dovish Bank of England outlook for U.K. growth and inflation pressured the British Pound all day. The BoE’s weak outlook negated most of the rally which took place on Tuesday following the establishment of a new government.
In the report released prior to the New York opening, BoE Governor Mervyn King warned that risks to growth had increased and that the Euro Zone debt crisis had made it necessary for the new U.K. government to speed up the process of developing a balanced budget. Furthermore, he added that interest rates would stay at a record low 0.50 percent for longer than the markets had expected. He then added that inflation was forecast to be below its 2 percent target in two years.
King was supportive of the new government and looked forward to working with it in an effort to turn the economy around while cutting the budget and reducing the sovereign debt.
The short-term outlook is a little more positive for the British Pound. Downside momentum may slow now that a new government has been established. Traders may celebrate the news that the Conservative party and the Liberal Democrats have formed a coalition to create a majority in the Parliament by exploring the long-side or lightening up on bearish positions. The move by both parties helped to put an end to the long-standing rule of Prime Minister Gordon Brown and the Labour Party.
The formation of a new government is seen as a positive for the British Pound at this time because it provides clarity to an almost dire situation. For weeks the Sterling has succumbed to selling pressure due to the possibility of a hung parliament. This situation would have created a problem because it would have made it virtually impossible for the new government to enact the austere fiscal measures needed to balance the budget and reduce the country’s debt.
The clarity provided by the “new coalition” between the Conservatives and the Liberal Democrats comes at an important time because of the events taking place in the Euro Zone. The formation of a new government will help to provide the psychological boost the British Pound needs to reverse the current down trend.
The USD CAD was under pressure most of the trading session and finished lower. Higher equity prices helped to boost the Canadian Dollar. Strong demand for the currency was also being driven by the bullish outlook for the economy and the stability of the Canadian banking system.
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