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The euro came under renewed pressure today as the European Monetary Union's credibility came back into question. EUR/USD fell 1/3 cent from a day's high of 87.40 to a low of 87.11 after trading most of the day in a tight 10 pip range. First to knock the euro was an unexpectedly pessimistic EMU report from Sweden that warned a monetary union area may not become a stable low inflation, low interest rate environment as hoped. Therefore, it is not certain that the euro will be a stable "hard currency" area. Moreover, the report highlighted the latent threat of diverging national growth dynamics within the union.
This brings to mind Germany's dilemma of needing a boost from either lower interest rates or higher fiscal spending. But the European Central Bank has been unwilling to lower rates below 3.25% for fear of stoking inflation. Meanwhile, the European Union government would like to censure Germany for irresponsible spending which is pushing their debt levels close to the 3% of GDP limit set out in the Maastrict treaty.
Further weighing on the euro was German Chancellor Schroeder's remark today that his government has not come up with a list of spending cuts or tax hikes to reign in Germany's budget deficit. German states do not want to reduce spending and this now compromises Fin Min Eichel's promise to the EU that the government would bring the budget close to balance by 2004, which was part of the compromise under which Germany avoided an embarrassing censure from the EU this month for its rising deficit. This also suggests that there is no way Eichel's promise can be met and that they may indeed face a fine from the EU this year if their growth projections are too high and revenue therefore too low, which would push the deficit to GDP ratio above the 3% limit.
EUR/USD fell to key support at 87.10 and could threaten the 86.80 level which marks the 50% retracement of the 85.63 to 88.03 move. Follow up support is seen at 86.50 and this month's 6 month low of 85.63. Failure to regain the key 87.40/50 mark will likely keep pressure on the pair after it rebounded from last week's low of 86.80 but met with heavy resistance at 87.46.
GBP/USD also fell to a day's low of 1.4282 after rising to a day's high of 1.4330 but failing to break key resistance around1.4340/50. Sterling also failed to break resistance at the 60.80 pence level against the euro and subsequently fell to a day's low of 61.01. On Thursday, GBP/USD briefly rose to a new 3-week high of 1.4362 following surprisingly upbeat UK jobs data which raised the expectations of the Bank of England raising rates later this year, which tend to benefit sterling. However, 1.4340/50 marks the 61.8% retracement of the move from 1.4515-1.4040 move and has so far provided tough resistance. Without a break of that level, the pair remains heavy, dealers say. Support seen at previous resistance levels of 1.4235 and 1.4180.
USD/CHF rose to a day's high of 1.7004 from a low of 1.6968 after holding above support at 1.6960/50. Resistance is now seen at 1.7055 which marks the 61.8% retracement of the 1.7229-1.6770 move. Support is seen at 1.6960, 1.6890 and 1.6820.
Meanwhile, the yen was little changed today, as the market remained cautious about the direction of USD/JPY after today's comments from Tokyo had little sway in the currency market. At Japan's news conference President Bush and PM Koizumi spoke about the non-performing loan and deflation problems hurting the Japanese economy. But the only movement came after Bush said he and Koizumi had spoken about "devaluation," confusing it with deflation, and sending USD/JPY spiking higher. JPY fell to a day's low of 132.85 against the dollar and 116.00 against the euro following the remarks. But markets quickly adjusted for the gaff and currencies are expected to remain steady today with no key data from the Eurozone and a Federal holiday in the US.
President Bush said he saw signs of a US economic recovery but maintained that Japan needed to stay vigilant about structural reforms. PM Koizumi repeated his pledge to tackle deflation and prevent a financial crisis. He also defended his administration's progress on reform, saying tough measures cannot be completed in only one year.
However, the market was disappointed by Japan's shying away on the injection of public funds into the troubled banking sector. The Nikkei rallied from 18-year lows this month following reassurances from the government that they stood ready to give troubled banks money. But today Japanese ministers again played down the need for any such action saying they saw no risk of a financial crises. Banking analysts were less certain, saying a bailout is inevitable given the precarious position of falling revenues and rising problem loans.
In the meantime, USD/JPY will remain constrained by repatriation flows back to Japan ahead of the March 31 book closing. Afterwards, the yen is likely to come back under pressure as Japan begins to tackle deflation and prevent a financial crisis.
There is no key data from the US today as the market observes a Federal holiday. Trading is expected to be thin.