The credit spreads of Eurozone’s most problematic economies are actually well off their highs with Greek/Germans bunds below 320 basis points after the Greek Prime Minister reiterated the notion that Greece is not asking for a bailout but simply for more time to reform its budget deficit. At the same time the latest treasury auctions in both Spain and Portugal have seen strong demand indicating that funding for the rest of Southern Europe is not an issue for the time being.
Yet the economic toll of the budgetary austerity now being imposed on EU member states is likely to stifle growth in the next several quarters and dampen investor enthusiasm for European assets. The region’s chronically weak consumer spending will likely deteriorate further under the weight of reduced government spending and increased taxation that is sure to come. Perhaps the only bright spot on the horizon is the decline in the exchange rate which should help the key export sector, but the gains are unlikely to offset the downward pressure on overall demand.
Meanwhile growth across the Atlantic appears to be improving as the latest batch of US economic data has surprised to the upside. The rally in the dollar is being driven by the idea that US economy will perform much better than EZ in 2010 and will therefore be the first to exit from the ultra accommodative monetary policy later this year. Yesterday’s FOMC minutes helped to fuel that theme further when they revealed that the US monetary authorities have started to discuss the specifics of the exit strategy at their last meeting in January.
The EUR/USD has repelled every effort to run the stops at 1.3500 level so far and given the large amount of option barriers at that figure the pair may hold support until the New York fix at 15:00 GMT today, However, if US econ news once again proves positive today support could finally give way. The tight correlation between EUR/USD and DJIA which dominated trade throughout 2009 has now totally broken down and any rally in US equities is likely to push the pair lower with a test of 1.3500 only a matter of time.