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In the previous EUR/USD weekly review, we noted that the inflation risk remains a concern for the financial markets on the whole. An observation would be the apparent little effect the Japanese Earthquake had on the economic policy decisions of a number of countries.
Looking at the EUR/USD daily chart above, we can see that the EURUSD is currently sloping downwards towards a test of the bottom channel trend line. As of now, it works out to be near 1.4 which is technically a potential strong support.
The beginning of the week saw continued speculations regarding an interest rate hike due to the ongoing inflation risk of the Euro Zone. This probably brought about much demand for the Euro currency.
Having said so, midweek began to display signs of a bearish fall out. Risk aversion from the Japanese Earthquake and its complications together with the Libya crisis probably exerted downward pressure to the EUR/USD. The upcoming EU economic summit resulted in apprehension too as traders speculate regarding the economic policies to be implemented.
Towards the end of the week, positive developments from the EU economic summit and the threat of a bail out for Portugal brought about wild ranging movements to the currency pair.
European leaders concluded in agreement regarding the restructuring of a bail out fund meant to resolve the Euro Zone budget deficit crisis. There was also talk on the European Stability Mechanism which is a permanent fund to help Euro Zone countries facing challenges.
While this is an optimistic development, the woes of Portugal is threatening to drive risk aversion deep into the markets. With deficit cutting measures facing immerse opposition, speculations run wild that it is doomed to go down the road of a bailout. Investors feels that if this happens, it may expose further risks of other Euro Zone countries.
Over in the US however economic conditions are still apparently improving. There were comments made by a Federal Reserve Bank President that the current quantitative easing policy should be reviewed if it is still required.
While this is encouraging, one must remain aware that the US economy is still facing fundamental challenges such as a poor housing market pick up and strained employment markets. In fact banks in the US are still being closed due to the inability to continue functioning.
Next week bring us more important economic data including the US Non-Farm Payroll. Caution is advised.
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