EURUSD: Where Art Thou Headed?

Tomorrow will mark the first time that the European Central Bank will be releasing an interest rate decision after the EU summit which discussed Greece’s debt issues. Seeing that a “solution” was made during the summit, could we expect a more upbeat report?

We probably shouldn’t expect a rate hike or any changes in quantitative easing measures. After all, the ECB has been famous for keeping a “wait and see” stance with regards to its monetary policy. Chances are that ECB President Jean-Claude Trichet will point to the improvements in the economy, but will also warn that it may be it is still too early to be jumping for joy.

The most likely focus of the upcoming ECB rate announcement will once again be Greece. Rumors circulated that Greece may actually ask for a restructuring of the aid package that would exclude help from the IMF. But if Greece’s debt situation gets rough once more, the EURUSD could find itself in a deeper ditch.

With that said, I decided to take a stroll along last week’s memory lane and saw that the recent set of economic figures from the euro zone could pave the way for some upbeat comments from the ECB. Data from Germany have been particularly impressive as the unemployment rate slid down from 8.7% to 8.5% in March.

Aside from that, German inflation indicators, namely the preliminary CPI and import prices, posted stronger than expected upticks. Apparently, inflationary pressures are no longer so subdued in euro zone’s largest economy. This brought the entire region’s annualized CPI estimate up from 0.9% to 1.5% in March, closer to the ECB’s inflation target of 2%.

Everything seemed to be fine and dandy in the euro zone last week also when debt-ridden Greece, along with the rest of the euro zone, started to work hand in hand with the IMF in securing an aid package. This allowed the EURUSD to bounce back from its recent string of losses…

Still, looking at the EURUSD’s recent price action, it appears that last week’s rally was merely a technical corrective move. Traders may have just covered some of their short positions before selling the euro again at a higher price. After reaching a high of 1.3592, the EURUSD managed to lose all of its gains last week in just three days!

You see, the EURUSD has been on a downtrend after hitting a high of 1.5144 last November 2009. If the bears manage to take the pair lower and break last week’s low of 1.3267, a move towards the 1.3000 handle is likely. It seems that the EURUSD is back to what it has been doing since the start of the year: dropping.

Technical considerations aside, I still believe the euro zone will eventually pull through and overcome its debt problems. A lot of effort was put in into creating a 16-nation zone with a unified currency. The member nations won’t let it crumble that easily.

A solution has already been planned and all that needs to be done is to actually put it into action. Hopefully, the IMF and the other euro zone nations stop being side-tracked, come together, and finally go through with their plan to bail Greece out of its predicament.