The European Central Bank is expected to hold its benchmark interest rate steady at 1.00% this morning. In addition, look for it to issue a statement saying that rates will remain low for quite some time because of the fiscal problems in several Euro Zone nations and the risk of contagion.
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.
With a few major nations raising rates or set to raise their benchmark rates in the near future and the ECB set to hold rates steady, traders will continue to sell the Euro because of the interest rate differential.
Following the release of the ECB policy statement, President Jean Claude Trichet is expected to try to instill confidence in the Euro during his post-meeting press conference. In his talk, he may 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.
Whether Trichet will be successful at persuading investors to continue to back the Euro cannot be determined at this time. What is known, however, is that hedge funds and large speculators are committed to the short-side of the market at this time 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.
Last night the Euro reached its lowest level since March 2009 while piercing the 1.28 price level. Today, more unrest is expected in Greece as the government and protesters clash about the implementation of austere financial measures. With the situation worsening, the ECB may have to consider what many see to be a drastic measure, and that is buying the sovereign debt of the ailing Euro Zone nations in the secondary market.
June Treasury Bonds are called lower this morning after closing sharply higher on Wednesday as equity markets collapsed and demand for safer assets increased. The rally early in the trading session sent yields plunging while triggering a breakout over the last main top at 121’05. T-Bonds began to break from the 121’14 high near the mid-session after triggering stops above the last main top at 121’05. Higher volatility and strong upside momentum should underpin the markets, but gains could be limited if traders decide to lighten up their positions ahead of Friday’s U.S. Non-Farm Payrolls Report.
June Gold is trading higher overnight. On Wednesday gold finished higher after a successful test of a key 50% level at $1158.60 encouraged fresh buying. Gold initially broke after a strong rally in the U.S. Dollar. A break in equity markets also helped drive down demand for the metal. After testing the 50% level at $1158.60 and putting in a bottom at $1156.20, gold began to rally as the Euro plunged over 1%.
Speculators began buying gold as a hedge against a possible collapse in the Euro. The strong momentum late in the trading session could lead to a follow-through rally on Thursday. The only negative to the gold market at this time appears to be margin call selling. Should equity markets break sharply again, traders may have to sell gold to meet their margin calls in the equity markets.
Global equity markets are trading in a tight range overnight. On Wednesday, U.S. stock markets broke sharply lower after a steady opening as unrest in Greece led traders to shed risky equity positions. As we approached the mid-session, buyers stepped in to gobble up low priced stocks, triggering a massive short-covering rally that took the indices back to unchanged for a little while. Short-term oversold conditions could trigger a rally along with position evening ahead of this Friday’s U.S. Jobs Report.
The weakening Euro is putting pressure on energy prices overnight. On Wednesday, a drop in demand for higher risk assets and the possibility that a slowdown in the Euro Zone economy will lead to lower demand for energy helped drive June Crude Oil lower early in the trading session. Shorts began to take profits after testing a key 50% level at 79.17, but bottom pickers were unable to turn this market positive. If the break continues through 79.17 then look for a possible test of the Fib retracement level at 77.18.
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