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Euro Propped Up By Hopes For ‘Bank Union,’ All Eyes On ECB

TheStreet.com - Jun 4, 2012

The Euro climbed to a high of 1.2465 as Spanish Prime Minister Mariano Rajoy called for a ‘banking union’ in Europe, and it seems as though the EU will increase its push to recapitalize the banking system through the permanent bailout fund as the group struggles to restore investor confidence. At the same time, French Finance Minister Pierre Moscovici voiced his support to increase the scope of the ESM, stating that it may be up for discussion at the next EU Summit on June 28-29, while European Central Bank board member Ewald Nowotny said the current move is the ‘right’ idea, ‘but will need significant time to be realized.’

In response, a spokesman for German Chancellor Angela Merkel argued that ‘it’s up to national governments to decide whether they want to avail themselves of aid from the backstop and accept the conditions linked to it,’ and we are likely to see increased pressure on the European Central Bank to ease policy further as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support. Meanwhile, Portugal announced it will inject more than EUR 6.65B into its three-largest banks amid the ongoing turmoil in the financial system, but the growing threat for contagion will continue to dampen the outlook for the region as European policy makers try to buy more time. Although the ECB is widely expected to keep the benchmark interest rate at 1.00% in June, market participants are pricing a 17% chance for a 25bp rate cut later this week, and we should see the Governing Council carry its easing cycle into the second-half of the year as the fundamental outlook for the region continues to deteriorate. As the relative strength index on the EURUSD climbs back from oversold territory, the pair looks poised for a correction, but we are waiting to see a break and a close above the 10-Day SMA (1.2497) to see the rebound gather pace.

Read Full Article from TheStreet.com

- Posted: 2012-06-04 09:03:34

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