Today’s EU Summit will be covering a range of issues, top of the list are the recapitalisation of Europe’s banks, the expansion of the EFSF (bailout fund) and the haircuts to be imposed on Greek debt. The meeting has been the sole focus of the market for the past fortnight.
There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.
It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.
We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.
Richard Driver
Analyst – Caxton FX
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