The Euro has all the reasons to celebrate today: G20 resolution, Trichet’s defiance, and bad jobless claims. The Euro will soon meet resistance, since this rally is problematic. Very problematic.
G20 leaks suggest that the leaders will succeed in reaching a joint agreement for stimulating the world. A $750 billion strong IMF can do much more. Hope and dollar spending push the dollar lower (well, except the Yen). The Euro enjoys it. More on the G20 and the US Dollar.
The EUR/USD also rises on a weaker than expected Unemployment Claims in the US. Jobless claims hit 669K, much higher than 649K that was expected. Also last week’s figure underwent a negative revision: 657K instead of 652K that was previously reported.
The main reason for the rise is the European interest rate: Interest Rate in Europe isn’t going down so fast. Jean-Claude Trichet has showed defiance, lowering the Minimum Bid Rate in Europe by only 0.25%, to 1.25%. This was a huge surprise to the markets, that widely expected a cut of 0.5%. EUR/USD leaped after the announcement.
This is surprising especially on the background of two economic figures in Europe: Inflation has declined in the Euro Zone to 0.6% in March. Such a low price change (annually adjusted) is almost deflation.
The second figure is unemployment rate in Europe which was also bad: it jumped to 8.5%, exceeding expectations to stand at 8.3%.
Trichet’s slow interest rates, despite a fast downturn in the European economy makes many Europeans angry. The economic problems in Europe send the anger against the governments, but also against the ECB and the Euro itself. Europeans are upset with Trichet and the ECB.
Talks about ditching the Euro as a common currency aren’t new. This decision joins other unpopular decisions of the ECB and renews talks of abandoning the currency. Doubts about the existance of the Euro are naturally – Euro negative.
So ironically, this decision, despite bringing a rally in the Euro, is very problematic. EUR/USD now trades 1.3420, after peaking at 1.35. We are still about 150 pips above the rate before the decision, but this rally doesn’t seem to be very long.
The final statement of the G20 summit, and tomorrow’s Non-Farm Payrolls will make the next moves for the Euro.