Greenback with its Back Against the Wall

To no one’s surprise, the German Constitutional Court has ruled to allow Germany to ratify the European Bailout Fund. The EUR as expected has rallied from 1.2850 before the ruling was announced to 1.2895 as traders are looking at this news as EUR positive.

The Court did impose conditions to the ruling and as these conditions are being announced the EUR is coming off a bit. The Court has stated that the German exposure to the ESM must not exceed EUR 190 billion without backing by the lower house of the Bundestag.

Guest post by  Matthew Lifson, Foreign Exchange Trader,  Market Analyst of  Cambridge Mercantile Group.

Basically the court has allowed Germany to ratify the rescue pact as long as it can guarantee there will be no increase in German financial exposure with parliament approval. Besides the EUR 190 million ceiling, the court also stated that ESM decisions must be approved by both houses of parliament.

According to chief justice Andreas Vosskuhle, “the laws that were challenged, with high probability, do not violate the constitution. The motions for a temporary injunction were to be rejected”.

Other Euro news involves Greece as the ECB issued a statement stating “Greece has taken significant steps towards budgetary consolidation and economic modernization, but that major challenges remain”. The troika was busy yesterday as they also were in Portugal stating the program there “is making progress”.

Asian equity markets wer all higher overnight and European stocks have rallied following the German court decision. DOW Futures are higher this morning indicating a positive opening for the US equity markets.

The USD remains under pressure against all currencies this morning as GBP has moved above the 1.6100 level, USD/JPY is below 78.00 and the AUD and CAD remain strong testing 1.0500 and .9700. Expect this USD pressure to remain through the day as the markets now turn their focus towards tomorrow’s conclusion of the two-day FOMC meeting. The majority of analysts expect the news conference by FED Chairman Bernanke following this meeting to include some announcement regarding additional easing (QE3) by the FED.

Technically, 1.2900 is slight resistance in the EUR and will likely be tested and broken by the time you read this. Further topside resistance is at 1.2940, 1.2975 and the psychological level of 1.3000. To erase the lastest EUR rally, the currency would need to fall back below support at 1.2835 and 1.2790.