Fundamental Report – April 22, 2013: Euro Bounces on Favorable ECB Headlines

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The EUR/USD is attempting a rebound into the end of the week, as traders deal with rumors suggesting the ECB is looking to implement additional measures to maintain the integrity of the European Monetary Union and prevent the need for any of the most heavily indebted countries to leave the Union. The EUR/USD is now trading back above the 1.31 handle, as the long term outlook looks supportive for the pair. This essentially suggests that we have likely seen the lows for the year, with the medium term valuation target coming in above 1.35.

Specifically, the ECB’s latest proposals create incentives for Spanish commercial banks to make loans for smaller companies. These attempts to jumpstart the regional economy out of its recession help make up a new set of options being considered by the ECB. So far, the market response has been favorable (with the Euro maintaining its uptrend), and this is an implicit suggestion that investors believe these plans to be credible and likely to work. These plans also go far to ensure reduced volatility in the Euro, as the most unpredictable scenario would include one or more countries to exit the Union. Volatility is generally a bearish scenario, so the reductions here help add to the bullish argument for the EUR/USD going forward.

Corporate Earnings Influence Forex Markets

Another factor to consider is the large corporate earnings scheduled that has been seen this week, with most of the results coming in positive. The bigger stories of the week included better than expected results from Google and Microsoft, and this helped to lift investor sentiment for most of the week. Stronger sentiment in the stock markets tends to be favorable for high yielding currencies and risky assets (such as the Euro), so this is contributing to the current weakness in the US Dollar as well.
Ahead next week, most of the focus in the currency markets will return to economic data, as there is a larger number of macro releases on scheduled. There was relatively little in the way of market moving releases in the macro arena this week, so most of the attention has been given to central bank commentaries, news headlines, and earnings as a measure of the health of the broader economy.

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