The Euro is rebounding this morning after a sharp sell-off on Wednesday. The single currency broke hard the previous session after a test of a key 50% price level at 1.4444 and while global equity traders were shedding risky assets. Early overnight weakness drove the market toward an uptrending Gann angle at 1.4283, stopping slightly above it at 1.4322.
Besides pressure from risk adverse traders, news that the International Monetary Fund would not pay its share of aid to Greece at the end of June was fueling a rapid sell-off. In addition, Moody’s Investors Service slashed Greece’s credit rating by three more levels, putting it into junk territory and signaling that it still had room to cut further.
The sharp break came to a screeching halt earlier this morning after European Central Bank President Jean-Claude Trichet said Euro Zone governments should think about setting up a finance ministry.
As the Euro Zone battles sovereign debt threats, Trichet said “Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?” He added further during a speech in Aachen, Germany that he favors giving the European Union powers to veto the budget measures of countries that go “harmfully astray”.
In his speech, Trichet highlighted a three-point plan: “First, the surveillance of both fiscal policies and competitiveness policies. Second, all the typical responsibilities of the executive branches as regards the union’s integrated and financial sector. Third, the representation of the union confederation in international financial institutions.”
Trichet’s bold proposal helped trigger a rapid turnaround in the Euro, helping it to regain all of yesterday’s loss and overtake a 50% level at 1.4444. This morning’s drive seems to have enough momentum to trigger a rally into a downtrending Gann angle at 1.4505 and perhaps a test of the .618 Fibonacci level at 1.4558.
Setting this morning’s news driven rally aside, talk of a possible double-dip recession in the U.S. economy continues to indicate that this weakness will keep the Fed‘s hands tied while pressuring interest rates to remain low. The continued strength in the Euro Zone economy sans the sovereign debt issues is likely to help maintain the ECB’s hawkish stance. This should keep upward pressure on the Euro because of the favorable interest rate differential.
