Categorized | Forex

FOREX-Euro rebound stalls, focus shifts to EU summit

FOREX-Euro rebound stalls, focus shifts to EU summit

* Fails to break above Ichimoku tenkan line

* Short-covering may lead market ahead of Wednesday’s informal summit

* Joint bonds a game changer, though chances seen slim

* Concerns about Spain, Greece keep euro under pressure

* Dlr/yen may head lower if BOJ stands pat on Wed

By Hideyuki Sano

TOKYO, May 22 (Reuters) – The euro’s rebound from four-month lows stalled on Tuesday, failing to break above technical resistance, though traders said selling could be limited at least until an informal meeting of European leaders this week.

Traders have been reducing their massive bets against the common currency in the past couple of days, taking note of prospects – however slender – that EU leaders may agree measures to bolster investor confidence in the euro zone on Wednesday.

With speculators’ short positions on the euro at a record high, traders were wary of the potential for short-squeeze, despite worries about stability of the banking system in Spain and political gridlock in Greece.

“If someone is selling the euro now, I would rather use that as a chance to take profits (from euro short positions). That’s the kind of feeling in the market now,” said a trader at a Japanese bank.

In Asian trade, the euro slipped 0.2 percent to $1.2792 , as short-term players sold the currency after it had failed to make a clean break above the technical resistance at $1.2811 from a tenkan line on the daily Ichimoku charts.

Still, it kept some distance from a four-month low of $1.2642 hit last Friday with many traders wary of further selling after data from U.S. watchdog showed speculators’ short euro positions climbed to a record high of 173,869 contracts.

France’s new President Francois Hollande is expected to push for a joint euro zone bond at the EU meeting in Brussels, a measure backed by Italy, Spain and the European Commission.

Germany, the EU paymaster, opposes any early move.

“I don’t think Germany can do an about-face. But we’ll have to see whether it will subtly change its stance towards joint bonds,” said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

“The market has been sort of supporting the German line of tough austerity. But that may be changing as well. Investors who have risk assets want their prices to rise and it’s becoming clear austerity measures alone are not going to bring about that,” he added.

GAME CHANGER

To be sure dealers see limited chance of a decisive move towards joint bonds given Germany’s stance.

But they do pay attention as joint bonds could be a game changer in markets gripped by fear on the euro zone’s debt problems, given that the euro zone as a whole has a lower deficit and debt than the United States and Japan.

Against the British pound, the euro changed hands at 80.90 pence, near its highest level in over two weeks, having risen for the past four sessions after hitting a 3 1/2-year low of 79.505.

But market participants are also cautious about getting their hopes up too high on the EU summit, which could well show a deep divide between the German-led drive for austerity and the efforts to put more focus on growth, a key pledge of the new French president.

“Talk about growth is fine. But it comes down to question of who will shoulder the bill for it. Unless it becomes clear, the fog on the euro zone won’t disappear,” said Katsunori Kitakura, associate general manager at Sumitomo Mitsui Trust Bank.

“I don’t expect the euro to recover above $1.29. It could well peak out at the current levels,” Kitakura added.

As the euro recovers from lows, the dollar’s index against a basket of currencies stepped back from a four-month peak hit on Friday.

The dollar index stood at 81.075, about one percent below Friday’s high of 81.758.

Against the yen, the dollar was slightly firmer at 79.46 yen , off three-month low of 79.002 hit on Friday, with traders focusing on the Bank of Japan’s two-day policy meeting starting on Tuesday.

Although most market players expect the BOJ to keep its policy on hold after an easing last month, there is some speculation about further easing, raising the possibility the dollar could fall on disappointment if the BOJ stands pat.

That could push the dollar below 79 yen, which could set it on course to test an important support level of its 200-day moving average, now at around 78.53 yen.

The Australian dollar fetched $0.9913, about a full cent above six-month low of $0.9794 hit last week thanks to broad recovery in risk assets on Monday.

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