DailyFX | February 21 2012 9:25 EST
Market sentiment weakened on Tuesday even as the EU agreed to release the EUR 130B bailout package for Greece, and the mixed reaction to the debt deal suggests that more needs to be done as the fundamental outlook for the euro-area remains bleak.
Euro: Greece Secures Second Bailout, S&P Warns Of Tight Funding Conditions
The Euro pared the overnight advance to 1.3242 as market participants remained skeptical that the new measures will prevent a Greek default, and the single currency may face additional headwinds over the near-term as the ongoing turmoil in the financial system heightens the risk for contagion. Indeed, Standard and Poor’s warned of unfavorable funding conditions for the bank sector as the European Central Bank prepares to launch its second three-year loan facility, and the weakening outlook for the euro-area may continue to drag on the exchange rate as the region remains at risk of a major economic downturn in 2012.
In response, European Union Economic and Monetary Affairs Commissioner Olli Rehn floated the idea of boosting the lending capacity of the rescue fund at the EU Summit scheduled for March 2, and went onto say that the Greek PSI will not set precedence for the periphery countries while speaking Brussels. As European policy makers step up their efforts to stem the risk for contagion, the EUR/USD may continue to track sideways over the near-term, but the single currency looks to be carving a top just below the 100-Day SMA (1.3312) as there appears to be a bearish divergence in the relative strength index. As market optimism fizzles, we may see the euro-dollar make another run at 1.3000, but we would like to see the euro-dollar close below the 50-Day SMA (1.3018) to see the pair give back the advance from earlier this year.
British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA
The British Pound slipped to an overnight low of 1.5772 even as the U.K. government posted the first budget surplus in four years, and the sterling may continue to give back the rebound from the previous week should the shift away from risk-taking behavior gather pace. Nevertheless, as Britain remains ahead of the curve in balancing its public finances, we may see market participants treat U.K. assets as a safe-haven, but the Bank of England Minutes on tap for tomorrow may keep the sterling in-line with its major counterparts should the central bank continue to soften its dovish tone for monetary policy. However, as the pound-dollar remains capped by the 200-Day SMA at 1.5917, the pair looks poised to track sideways over the near-term, and the technical outlook certainly fosters a bearish forecasts for the GBP/USD as it appears to be carving out a top in February.
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--- Written by David Song, Currency Analyst
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