Euro Gains on German Court Ruling

on Sep 14, 2012
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Today the German court ruled against a petition meant to block the creation of the European Stability Mechanism €500 billion (£400 billion) rescue fund. The ruling immediately triggered a wave of upswings in the markets, including falls in borrowing costs for struggling Eurozone countries. Angela Merkel defined it as “a good day for Germany and good day for Europe”, while other prominent German politicians across the political spectrum praised the ruling as light at the end of the tunnel for the beleaguered currency.

Following the decision, the euro rose 0.5 percent to $1.2937 on trading platform EBS, reaching a multi-month high due to investors’ optimism. This is the strongest level of the currency since mid-May and is mainly propelled by last week’s announcement by the European Central Bank (ECB) that it plans to lower the borrowing costs of indebted Eurozone countries via bond-buying.

The euro could potentially be wrestling with the $1.30 barrier as markets are expecting the US Federal Reserve to implement a new round of monetary easing on Thursday. “Confirmation of more QE (quantitative easing) from the Fed would help it higher but I’d expect any knee-jerk rally to be limited.” opined Barclays’ currency strategist Guillermo Felices.

!m[](/uploads/story/372/thumbs/title_pic1_inline.png)In anticipation of the outcome from the Federal Open Market Committee (FOMC) meeting this week and amid believes that the Fed will do more to stimulate the US economy, the dollar retreated against a number of currencies including the pound, yen, the Australian dollar, the Swiss franc and the Canadian dollar.

“The markets are really waiting for a third round of quantitative easing…We think it is very likely that the FOMC is going to announce a new asset purchase programme.” said one of Radobank’s analysts.
The dollar’s losses also stem out of a Tuesday warning from credit rating agency Moody’s that the US could lose its triple-A debt rating if next year’s government budget discussions do not produce sound policies that aim to gradually cut the country’s looming debt.

The euro remained dormant against the Swiss franc staying flat at SFr1.2073 but still above the SFr1.20 ceiling the Swiss National Bank (SNB) holds in place for the euro-franc pair. According to analysts, it is highly unlikely for the SNB to lift the ceiling at which it buys euros and weaken the franc up to SFr1.22. Commerzbank analysts noted: “By now, anyone betting on the SNB raising its minimum exchange rate should have started to doubt their decision as the central bank has not signalled any step in this direction,”. SNB is expected to announce its monetary policy decision on Thursday.
The euro has soared more than 7 percent from July’s two-year low of $1.2042, mainly buoyed by the ECB and Mario Draghi’s pledge to do whatever it takes to preserve the currency. But despite encouraging gains, analysts and traders remain wary and remind that the intensity of the Eurozone’s debt crisis could put a halt at the euro’s rally.
Another potential tipping point for the euro this week are the general elections in the Netherlands, yet it seems as if disaster is averted with polls signalling that the anti-EU radical parties have lost the momentum they had just a month ago.

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