The EUR USD plunged sharply lower on Thursday breaking through 1.26 and approaching dangerously close to the October 2008 bottom at 1.2329. There may be a technical bounce if this area is tested, but longer-term swing charts project a possible break to 1.14.
Early Thursday morning the Greek government passed its new cost cutting measures, making Greece eligible for the bailout money offered by the European Central Bank and the International Monetary Fund. The Euro continued to weaken however, as bearish traders focused their attention on similar fiscal problems developing in Spain and Portugal.
This morning the ECB voted to leave interest rates unchanged at 1.0%. It also added that rates would remain low with financial uncertainty still expected to be a draw on the Euro Zone economy. Because so much money is being set aside to bailout Greece and additional funds may be needed to support the economies of Spain and Portugal, the ECB cannot afford at this point to begin raising interest rates without risking a possible double-dip recession.
ECB President Jean Claude Trichet offered no solid relief to investors in his post-meeting press conference. Many traders had expected him to make a much stronger statement regarding the Euro Zone problems but his talk failed to instill any confidence in investors. In fact, the Euro continued to break sharply after his press conference.
Major players wanted to hear Trichet address the possibility that the ECB is considering buying government bonds or diverting financial stimulus from other parts of the economy to address the fiscal needs of the struggling nations. During his talk this matter never came up. Throughout today’s massive sell-off, traders were looking for, and analysts were calling for, the ECB to step in and start buying government bonds.
Trichet also said there would be no default of Greek bonds. Traders however continued to punish the Greek capital markets after this statement. This sent a clear signal that the Greek government, the ECB or the IMF did not have a grasp of the situation. In fact it reaffirmed that bearish traders were in charge. What is known at this time is that hedge funds and large speculators are committed to the short-side of the market and not expected to lighten up because the fundamentals clearly support a weaker currency.
Analysts continue to feel that the worst is yet to come as the capital markets in the Euro Zone continue to run out of control. Many feel that the ECB has been behind the curve and that the ECB hasn’t acted fast enough to stem the Euro’s downfall. Unless the central bank steps in to provide stimulus or to buy Greek bonds, look for the same weakness in the currency to continue tomorrow.
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