If you think price action on the euro will die down now that the ECB rate decision is done and over with, you’re mistaken, bub! With so many heavy events on the calendar this week, I wouldn’t be surprised to see euro pairs exhibit a lot of volatility. Wednesday is a particularly big day for the shared currency with three major events scheduled in the euro zone.
Proposal for a Banking Union from the EU
European Commission President Jose Manuel Barroso is set to unveil the commission’s plan to put up a banking union. European leaders think that if the ECB were to oversee the euro zone’s 6,000 banks through a banking union, it would help stabilize credit conditions in the region.
This could turn out bullish for the euro if the banking union is set up efficiently and effectively. EU leaders plan to give the ESM the ability to refinance banks directly after the ECB assumes its role as a supervisor, giving them another weapon to fight the debt crisis.
On the other hand, things could turn ugly for the euro if we see further delays and disputes. Remember, a few issues still have to be ironed out. For instance, Germany wants Europe’s 30 largest banks under the ECB’s supervision, while the European Commission wants the ECB to look after all of Europe’s banks.
Another potential market-mover tomorrow will be the elections held in the Netherlands. Market junkies say that Dutch voters could change the dynamics in the euro zone as they head to the polls.
You see, the Netherlands led by Liberal Prime Minister Mark Rutte has always supported Germany’s austerity-centered reforms. The outcome of tomorrow’s elections could determine whether or not German Chancellor Angela Merkel would still have a Dutch ally when she pushes for more fiscal consolidation.
It’s not likely that a single party would secure a majority. The best that euro bulls could hope for is for the Liberal Party and the like-minded Labour Party to get the most votes.
The Dutch elections could disappoint the market consensus if the Socialist Party and the Freedom Party edge out the other pro-austerity camps. The two political groups have been campaigning against austerity at home and hostility towards further euro integration.
German Constitutional Court Ruling on the ESM
German parliamentary member Peter Gauweiler submitted a complaint against the ECB’s bond-buying scheme and has forced the German Constitutional Court to re-examine its decision on the ESM. The court will conduct an emergency session regarding the issue today and will announce its rule on it tomorrow.
The 8 scarlet robe-wearing justices of Germany’s highest court will most probably not delay its decision on the ESM. Market junkies are banking on the assumption that the court understands the severity of the economic and political consequences of a delay in the implementation of the rescue fund.
A surprise decision could spell disaster for the euro zone as a delay could keep the ECB from launching its bond purchase program. On top of that, should the justices block the ESM, the region may just find itself short of cash to bail out troubled countries such as Spain and Italy when the need arise.
Taking a look at EUR/USD‘s daily chart, we see that the pair is now approaching the 200 SMA, a level that was well-respected in the past. Depending on the results of tomorrow’s affairs, we could see the pair close above the 200 SMA and possibly signal the beginning of a new trend. On the other hand, a sharp bounce off the lagging indicator, as we saw in July and October of last year, is just as likely.
How do you think the pair would react to it given tomorrow’s roster of high-caliber events?