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Talk about setting the bar low before the EU Economic Summit. With the two day summit kicking off this morning, Forex traders , and for that matter pretty much everyone else isn’t expecting any worthwhile results. This contrasts from previous EU Economic Summits where we saw the Euro and European equities seeing gains on anticipation of positive news, gapping higher after a new agreement was reached, and subsequently selling off as the markets realized that nothing new would be implemented.
After so many failed attempts, the Euro isn’t seeing any love from Forex traders this morning as it continues to move lower and has hit a low of 1.2407. However, with expectations at minimal, it could be setting up a potential upside trade if we see any semblance of positive news from the EU Summit.
EU Banking Union
On the eve of the EU Economic Summit, The Guardian published an article yesterday titled Spain's banking bailout is a missed opportunity . They wrote “The line of credit to Spain from fellow Eurozone governments may help to stabilize a fragile banking system, at least in the short term, but it is a missed opportunity. Spain's banking crisis provides a perfect opening to move towards a European banking union.” Basically, their belief is that by providing the short term relief to Spain, it will prevent the urgency for the implementation of an EU Banking Union which was the idea presented by the EU Parliament earlier this month.
On that note, we are willing to argue that the idea of a EU Banking Union remains alive and well and that Spain’s banking bailout is a separate matter. The reason for this opinion is that the other big idea being floated among EU nations is the Eurobond, or collective responsibility. Going into the EU Economic Summit, this idea was being heavily protested by Germany. With cheap Euro’s providing solid gains for Germany’s export sector, the country isn’t in any hurry to put itself at risk for the rest of the EU’s fiscal problems.
As such, with a Eurobond solution looking unattainable at this current stage, we believe that the EU leaders in favor of the Eurobond will be pushing ahead with the EU Banking Union initiative as a “first phase” to than reach Eurobonds and some sort of collective responsibility.
Back to Forex Trading & the EURUSD
Returning to the subject of low expectations, the EURUSD looks poised to rally if Forex traders receive any signs of positive developments from the EU Economic Summit. Specifically, if the EU Economic Summit does nothing other than lead to an EU Banking Union, we would expect it to spark interest back in the Euro and lead to a move back towards 1.2550 in the EURUSD. (With the potential for a post EU Summit Euro rally, we’ve taken the morning Euro weakness to close our previous EURAUD position).
On the other hand, if the arguments and name calling among EU leaders continues throughout the EU Economic Summit, it would provide further reasons to be skeptical about the EU managing to forge a rescue plan. On such a scenario we would expect the EURUSD to retest its 2012 lows and we would be sellers again of the EURAUD.
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