EURUSD Rebounds as EU Summit Focuses on Prosperity Not Austerity

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Market Drivers for March 15, 2013
Euro mildly bid as tone from EU Summit less austere
Iwata confirmed but no reaction on yen crosses
Europe -0.29% Nikkei 1.45%
Oil $93/bbl
Gold $1591/oz.

Europe and Asia:
EUR Euro-zone CPI 1.3%

North America:
USD CPI 6:30
USD Net Long-term TIC Flows 7:00
USD Industrial Production 7:15
USD U. of Mich Confidence 7:55

Euro perked up in morning European trade rising above the key 1.3050 level as commentary from EU summit downplayed austerity and focused more on growth encouraging investors to plow back into currency. The recovery in the pair which started during yesterday’s North American session extended in today’s European dealing as sentiment towards the euro improved.

Both France and Italy insisted on a more flexible approach with respect to fiscal budgets and won what was view as concession when Germany did not formally object to their request. Indeed Angela Merkel avoided any clash with France, telling reporters: “We made clear in a very consensual discussion that budget consolidation, structural reforms and growth are not in contradiction but are mutually reinforcing.”

European leaders are beginning to realise that a policy focused solely on austerity is failing miserably both an economic prescription and as a political stance. The election in Italy made it abundantly clear to the politicians that the citizenry of Europe will not tolerate any further deficit cutting until economic conditions show a modicum of improvement. Therefore the more accommodative posture by the EU summit suggests a small but significant shift away from austerity towards more growth oriented solutions.

The uptick in EUR/USD is very much reflective of this optimism by investors that the region could begin to recover from the severe contraction that has plagued it since Q4 of last year. The rebound rally in the EUR/USD could take it towards the 1.3100 level but any further progress may be slow as the pair faces strong resistance above that figure.

Next week shapes up as a crucial test for the currency with a slew of key economic reports on the docket including ZEW, Flash PMI and IFO. If the data begins to show some improvement then the recovery thesis could take hold and the EUR/USD could rally towards the 1.3300 level as the week proceeds.

Boris Schlossberg
Managing Director

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