Over the past week, markets have finally heard the necessary powerful messages to launch one of the most aggressive attacks against the value of the USD YTD. The wording 'would do what it takes' to save the Euro, to maintain the US afloat, and to help find a bottom on China's slowdown, courtesy of Mr. Draghi, Mr. Beranke, and China's Premier Wen, have had the market busy pricing in stimulative policy responses.
Selling all things USD dominant theme
The latest hope for action, has resulted, as John Noonan, Head of IFR Markets notes, "in investors to venture back into risk short term with a EUR/USD 1.3000 test & 1.1000 for AUD/USD viable." John adds that "investment houses continue to report massive EUR buying from macro funds, with the move that started as a trickle now turned into a flood."
"Market is pretty bullish in the EUR/USD ahead of what could define the pair destiny for this month, the German Court ruling on ESM to take place at 8GMT", says Valeria Bednarik, in-house chief technical analyst. "Basically, they will vote if Germany participation is legal, and in which extension. The legal twist they can give to the approval are the ones to watch out, as a limited participation, will probably won’t be well taken among investors" Valeria adds.
Consensus ESM approved: Will it come with conditions?
From RBS: “Market consensus for today's Constitutional Court judgement is overwhelmingly that the Constitutional Court will not block ESM and the Fiscal Pact: 99% of respondents in our Investor poll this week subscribe to this view.”
According to a Reuters poll of 20 legal experts, there is unanimous consensus the soon-to-be-established ESM will be approved but with strings as the wildcard.
Meanwhile, a WSJ article explains that strings could mean a German limit on contributions, making a case for euro shorts ahead of the court decision, due at 0800 GMT today.
Vincent Cignarella, currency strategist/columnist for DJ FX Trader, writes: "Various legal scholars predict that the court will approve the ESM but insert significant constraints on its operations. A commonly held view, for example, is that it will limit Germany’s maximum contribution to the fund at EUR190 billion–in keeping with the country’s pro-rated weighting within the facility’s $700 billion in paid-up capital–and give the Bundestag, Germany’s parliament, effective veto power over ESM operations. This wouldn’t exactly be a market-friendly outcome."
EUR/USD with bullish signs all around; targets 1.30 big figure
If one is to judge the latest price action in EUR/USD, Tueday's daily close above the 200 day EMA, and recent upside breakouts in both, long-held descending trendline and recent channel resistance, all indicates strength is stubbornly strong, with the acceleration out of channel suggesting higher ground is on the cards. The next key hurdle for the pair going forward will come at the big round number 1.30, with corrections likely to find grateful buyers at 1.2820 first, and if not holding, expect 1.2760 handle to provide solid support.
Dutch election, banking union plan
Today, the market will also keep an eye on the Netherlands parliamentary elections, expected to get a strong showing by the Socialists as public opinion seeks to limit austerity plans and support for rescue packages to peripheral economies in the Eurozone. An overwhelming majority of market analysts, however, doubt the results will prove particularly unsettling. One factor to bear in mind is that unlike Germany, the Netherlands, does not enjoy veto powers over the operation of the ESM.
Moreover, a banking union proposal will also steal some of the trader's attention. As Kathy Lien, Founder at BK Asset Management, notes: "The EU will offer 2 proposals for a Banking Union. One of the drafts that have been leaked to the market gives the ECB widespread power over the region's banking sector. This includes the right to authorize, assess and withdraw the licenses of banks as well as impose capital requirements and conduct stress tests. There is very little debate about the ECB being the central authority in the banking union but the critical question is the amount of details that will be provided in the proposals. The more they provide, the better it will be for the currency."