The euro pared its losses against the major pairs in early trade today heading into the weekend as the EU stated is expects a Greek PSI deal to be reached in the “coming days.” Seems that we have all heard this story before.
As policymakers scrabble to avoid a default, analysts are pointing out that it appears more and more that the European Central Bank will have little choice but to take a huge haircut on its Greek debt holdings.
ECB board member Jose Manuel Gonzalez Paramo talked up speculation for additional monetary support, pointing out that the Governing Council will have to push the benchmark interest rate below 1.00% as the euro zone faces an increased risk for a major economic downturn in 2012.
Meanwhile, the euro zone still has not pulled together to present an executable solution for the debt crisis, which only strengthens our bearish outlook for the single currency going into February.
The EUR/USD looks poised to work its way back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low as USD finds its footing.
“Risk on” sentiment appears to be slowing after today’s GDP report showed the world that its largest economy was still growing at an annualized 2.8% in the fourth quarter.
However, in the same breath that forecasts for GDP ratcheted up to 3.0%, private sector consumption fell short of expectations. Analysis warns that households continue to cope with wage growth slowing and high unemployment.
Although the GDP report encouraged risk-taking sentiment, it should prop up the U.S. dollar during the North American trading session.
Traders can look at a pair trade by selling and buy the CurrencyShares Euro Trust (FXE, quote) and Power Shares DB US Dollar Index Bullish Fund (UUP, quote) ETFs.
Selling the FXE and buying the UUP will mimic selling the EUR/USD (short) in the forex market. Traders can reverse the pair trade to be long the EUR/USD in the forex market.