By: Christopher Lewis
Wednesday saw the European Central Bank release 489 billion Euros to over 500 banks at the benchmark rate of 1% for the term of three years in order to push more liquidity through the European banking system. The hope is that the banks will in turn buy sovereign bonds that have been so badly beaten up over the last several months now that the operation would be in theory a risk-free move. Of course, this doesn’t factor in the possibility of a default which would be even more disastrous after these loans.
The 489 billion Euros was much more than the estimated 293 billion that the analysts had forecasted, and the larger than expected amount certainly got many market participants a bit more nervous as it underlines exactly how bad the situation could be in the EU going forward. The concern is that many of the lending institutions may be using this money to cover all kinds of holes in their balance sheets.
The Euro initially had risen in Wednesday trading, and even reached as high as 1.31971 during the European session. A few short hours later, and the EUR/USD fell to the 1.30261 level. The move was sudden, and could have been helped along by the low volume in the markets presently. None the less, the move shows that the market is still very nervous about the European situation, and will be for the foreseeable future.
The 1.30 level sits just below, and the handle begins the massive 100 pip support zone down to the 1.29 handle. The EUR/USD has struggled to get below it recently, and a move below that level before the New Year might be difficult, but the upward momentum is simply so easily broken, it is hard to get overly bullish at this point in time.
The bias is most certainly to the downside, and as a result I have been selling rallies in this pair. The US dollar should continue to gain against most currencies as the safety trade will certainly continue as we work through the problems in Europe. It is only recently that the market seems to be willing to admit that the situation in the EU could go on for a long time, and as a result the pair will more than likely break that support level, but it is going to take a major headline to do it.