Euro Recovery Set to Stall

Caution is required as quarter-end position adjustment could spark near-term volatility. There will be strong expectations that the ECB will cut interest rates again this Thursday while economic fears will also be an important feature as the OECD forecasts a deep European recession and credit-rating downgrades continue. Any confirmation of a move to non-standard credit policies would also tend to weaken the currency. Euro selling should be contained at this stage, especially as an interest rate cut should be priced in and there has been firm technical buying above the 1.31 region. The most likely outcome is that the Euro recovery will stall below 1.34 and drift back towards support near 1.31 over the next 36 hours.

The Euro-zone economic data has remained generally weak over the past 24 hours with the business confidence index weakening to a fresh record low while Spanish inflation turned negative according to the latest monthly data. German unemployment rose by a further 69,000 in March.

The Euro-zone flash headline rate fell to 0.6% for March from 1.2% and there will be further strong expectations that the ECB will cut interest rates by a further 0.50% to 1.00% at the Thursday policy meeting. The potential for quantitative easing will also be important with ECB Chairman Trichet stating that a decision whether to buy corporate bonds had not yen been reached.

Speculation over an ECB policy switch, allied with sharp Wall Street losses, pushed the Euro to a low of 1.3115 before a corrective recovery to 1.3190 as significant technical support levels held. The Euro continued to correct slightly higher on Tuesday as risk appetite improved. Recoveries were limited as there were further credit-rating downgrades for European countries with Irish and Hungarian ratings both cut over the past 24 hours.

Investica
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