A look at the the recent European bailout plans from Michael Hewson, CMC Markets.
Euro Loses Ground as Bailout Effect Wanes
The Euro has continued its slide back from its overnight highs after a slow realisation that the bailout, while welcome from the point of view of bringing down CDS spreads, merely kicks the can down the road.
That is of course unless measures are taken to deal with the underlying structural problems affecting the most indebted of Eurozone nations.
Another potential problem is the extent of the €440bn worth of loan guarantees from Euro member states. Some of these states are in no position to contribute to these guarantees given their own fiscal problems which begs the question as to who fills the hole if some of these states should drop out. It will in all likelihood be that Germany would have to make up the shortfall.
There is also the credibility question; a strong economy shouldn’t need a bail-out. The fact that only last week ECB President Trichet said the prospect of bond buying wasn’t even on the agenda also suggests that the European Central Bank has been bounced into bond purchases by the politicians, which brings the independence of the ECB into question.
It certainly hasn’t sat well with some members of the ECB council, which was split on the decision with Axel Weber, Bundesbank president, expressing his reservations and saying that buying bonds has “significant risks.”
This easing of monetary policy, as well as any improvement in the US economy, will weigh in the Dollars favour, and suggests further down side risk for the Euro.
Since the beginning of February the Euro has been trading steadily lower in a downward channel, where the upper boundary currently sits around the $1.3530 area. There is also resistance just below the April lows at $1.3115/20.
While the Euro continues to trade in this broad downward trend the target of $1.2135 over the next few weeks continues to be the primary objective.
The $1.2135 level is a key Fibonacci support level in that it represents a 50% retracement of the up move from the all time Euro lows at $0.8230 set in the October 2000 to the highs of 2008 at $1.6040.
A break of $1.2135 would then target $1.1210 which is the 61.8% Fibonacci retracement of the same up move.
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The above content does not constitute investment advice. Neither CMC Markets nor Online-Spread-Betting.com accepts any responsibility for any use that may be made of the above.
Article approved by CMC Markets. CMC Markets is authorised and regulated in the UK by the Financial Services Authority, registration no. 173730.
Note - Spread Betting carries a high level of risk to your capital and you can lose more than your initial investment, it may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
'Euro Spread Betting and the Bailout', Feature by D. Jones, last update: 12-May-10
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