Since the start of the EZ sovereign debt crisis several year ago, trading in the EZ has been dominated by macro rather than micro economic forces. Headlines from Frankfurt, Brussels and Berlin has trumped any and all economic data and have resulted in a cycle of downward prices as disappointing macro policies lead to deteriorating investor and consumer sentiment which in turn leads to poor micro economic performance.
This week the battle between macro and micro comes to a full head on Thursday as Angela Merkel and Francois Hollande meet to discuss further responses to the sovereign debt crisis while the economic calendar brings flash PMI figures from the region which provide the best and most accurate picture of economic activity on the ground.
Euro bulls are hoping that both macro and micro news could deliver a one, two knockout punch to the shorts, forcing them to run for cover which would push the EUR/USD through the key 1.2500 threshold. On the macro front, investors are awaiting the greenlight from Merkel and Hollande on a possible plan by the ECB to curb interest rate spreads between the core and periphery yields. The idea is that the ECB would clearly state to the market the amount of spread it will tolerate ( for example no more than 300 bps for Spanish bonds over German bonds) and would step into the market whenever prices exceeded those targets. Although such policy flirts dangerously with the notion of moral hazard, some analysts believe that the cost to the ECB may be minimal as the mere jawboning would scare the market into following the policymakers targets much like the EUR/CHF pair has held the 1.2000 level in the currency exchange markets. Indeed, the credit markets are already starting to respond favorably to the idea with Spanish bonds down further 16bps today to 6.22%.
Meanwhile on the micro front the flash PMI data will be due at 8:00 GMT on Thursday, just as Merkel and Hollande commence their meeting. The markets are not anticipating major improvement in the numbers, but the mere fact that they may have stabilized and have not deteriorated further could be seen as a mild positive for the EZ economy.
The EUR/USD has been stymied several times at its attempt to clear the 1.2400 barrier as the pair tries to stage a recovery rally. This Thursdayâ€™s combination of macro and micro events could prove pivotal to the pairâ€™s near term direction. If investors perceive a sense of true commitment on the part of Merkel and Hollande to stabilize the periphery sovereign debt markets while the eco data shows no further deterioration in demand, the news could propel the euro through that key resistance level and perhaps through the 1.2500 barrie as well. If on the other hand EZ policy makers continue to dither, the sense of disappointment in the market could embolden the shorts to gun for the 1.2000 barrier once again.