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European leaders reached an agreement about the debt crisis after the markets were closed. This agreement is important, yet not sufficient. Here’s an analysis of the deal and the implications on EUR/USD when markets open.

Very late on Friday, the European leaders reached an agreement about the next stages in the debt crisis. The discussions that last for over eight hours reached two significant conclusions, although they aren’t enough:

  1. Full bailout fund will be available: The EUs share in the EU / IMF bailout fund is 440 billion euros, but only 250 billion was available up to now. Following this agreement, all the money will be available. This means that if Spain gets into trouble, the fund will be ready to as well. Did they just open the road for a bailout for Spain? Yields on Spanish bonds are also refusing to fall at around 5.50%. Anyway, it won’t be enough for Belgium or Italy.
  2. Bailout fund can buy bonds: This sounds promising, as an intervention in the open markets to buy bonds of troubled countries can rescue them before a full bailout program is needed – such a mechanism can enable the troubled countries to continue raising money in the open markets, at sustainable interest rates. But – and this is very important – bond buying will be allowed “only if the respective country is locked into a national bailout program based on strict conditions“. So, as Portugal didn’t get a bailout yet, the fund can’t buy bonds and can’t lower its yields.

Yields on Portugal’s 10 year notes are around 7.50% for quite some time. Raising money to cover previous is becoming very expensive. Ireland already got a bailout at these yield levels.

And, Portugal faces a big load of debt to pay back in April. So, time is really running out on Portugal.  While the deal is a significant step forward, it falls short of providing a real solution for the debt crisis.

EUR/USD Impact

After the Euro enjoyed the explicit words of Trichet regarding a rate hike, the focus is likely to shift to the debt crisis. EUR/USD managed to climb back at the end of the week on speculations. But,the fears about the debt crisis are already seen there.

Being unable to breach the important resistance line of 1.4030 is important. This line is preceded by 1.3950, which is a minor resistance line.

Immediate support for EUR/USD is at 1.3860, with more mportant support for Euro/Dollar is found at 1.3760, which cushioned a fall in the past week. Much more important support can be found at 1.3440. There are many more lines in the middle and below.

For more technical levels, see the EUR USD Forecast.

The Euro is likely to drop at the beginning of the week after the agreement fell short of providing a comprehensive solution.

What do you think?