High hopes in the fx markets

Written by Mitul Kotecha Tuesday, 11 October 2011 15:21
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EUR/USD has rallied over recent days from a low around 1.3146 last week.

Market hopes of a eurozone solution may fall flat but the pressure on officials has ratcheted higher, and the risks of failure are now too significant to jeopardize with half measures. Weekend promises of banking sector recapitalisation by Germany and France have helped but will not be enough should such promises prove empty. Markets will likely give the benefit of the doubt to eurozone officials ahead of the delayed October 23 EU Summit and the November 3 G20 meeting.

Consequently EUR will find some support over coming days and could extend gains as risk appetite improves; having broken above 1.3600 the next big resistance level for EUR/USD is 1.3800. The fact that EUR speculative positioning is very negative (biggest short position since June 2010 according to IMM data) highlights the potential for short covering.

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Mitul works in Hong Kong for Crédit Agricole Corporate & Investment Bank, where he is the head of global currency strategy, he is the author of the forthcoming book Gyrating Currencies.

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