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The G20 failed to deliver the goods at the weekend and there was no agreement from the cash rich emerging nations or the US or UK to extend the IMF's war chest by the $500mn Christine Lagarde has said she wants. The world's leaders won't help Europe out until - as UK Chancellor George Osborne said - it shows the colour of its own money.
This makes the vote in the lower German Parliament today on the latest EUR 130bn bailout for Greece crucial. In the absence of much economic data all eyes will be on the vote that takes place at 1400GMT/ 0900 ET. It is expected to be passed, although a dozen or so members of Merkel's own party are against the second bailout for Athens. However, what is more worrying is the lack of support from the German public over more bailout funds for Greece. According to a poll conducted by a Sunday newspaper, 62% of Germans polled are against the rescue package.
Merkel may not go to the polls until 2013 but she will be keenly aware that public opinion is shifting, which may make her ultra-cautious when it comes to pledging more German taxpayer funds to sorting out the Eurozone's woes. Added to that, if French Socialist Presidential candidate Hollande wins the election in May, then Germany could lose its austerity ally. So just as the German public is losing faith in bailouts, so too could the German leader lose her ability to demand concessions in the form of austerity from bailed out nations. This could hamstring Germany, the only country in the currency bloc with the funds necessary to sort out this crisis.
Thus, no wonder German Finance Minister Schaueble played down the prospect of Europe agreeing to boost the ESM above EUR500bn at this week's EU summit. He mentioned that a decision could be made this month, but reminded reporters that March has 31 days in it...
Essentially there is a G20 meeting in April, which now acts as another tentative deadline for Europe to boost the Eurozone's firewall. Thus we will soon find out just how much pressure is on Merkel to get stingy with her European peers and refuse to boost the bailout fund. In which case the best we can hope for is a combined EFSF and ESM fund totalling EUR 750bn. However, Merkel could still reject this, even though the Netherlands, France and even Finland are in favour of it, since it would mean extending Germany's overall contribution, which is the largest in the currency bloc.
The optimism from the Asia session has disappeared since the European open. Stocks opened down and the Dow Jones, which had been at 13,000 at one point on Friday, has backed away from this key psychological resistance level and is currently expected to open around 12,900. The same can be seen across asset classes. After having a go at 1.35 earlier, EURUSD is at fresh daily lows below 1.34, while USDJPY backed away from the top of the weekly Ichimoku cloud at 80.94. In contrast safe havens are gaining back some lost ground today: the yen, US Treasury yields and German bund yields are all performing strongly in the face of this wobble in risk as we start a big week for the markets.
So what to make of it? Does this mean that markets no longer have faith in the ability of the ECB's next LTRO auction on Wednesday morning to relieve the problems of the Eurozone? We would argue no. There is so much noise in the macro environment right now (from German reluctance to boost the Eurozone firewall to some scepticism that Greece will be able to meet its austerity commitments) that it can be easier to look at the technical picture for signs of where price action may be going. Right now the majors including EURJPY and EURUSD suggest that today's pullback was extremely normal after prices moved into overbought territory on Friday- as measured by the RSI. As we said last week, above 1.3320 is a bullish sign for EURUSD, but as we approach major resistance levels like 1.35 this could trigger major bouts of profit taking. However, the technical indicators suggest that dips may well prove to be shallow. Right now the hourly RSI's for the euro crosses are looking oversold on a short-term basis. Added to that, AUDUSD (often the leader of the FX risk pack) has bounced nicely off support at 1.0650. Its recovery this morning suggests that investors' appetite for risk could pick up as we move towards lunchtime and that all important German vote. However, ranges may well persist, with 1.35 now being the major target in EURUSD.
Whether or not a yes from Germany to Greece's second bailout could trigger a relief rally we shall have to wait and see. Even with the uncertainty facing Europe's sovereign crisis the pull of Wednesday's liquidity injection could be enough to help propel this rally in risk in the medium-term. This is still enough to boost demand for Italian debt. Rome sold 6-month bills today with a yield of 1.202%, the lowest level since September 2012.
Watch out for the Middle East issues too. They could dampen sentiment, regardless of what happens in Europe. Brent crude has backed off its highs from $125.50 per barrel, but remains at an elevated $124, which threatens the already fragile global economic recovery. Any negative headlines from Iran or signs that Israel may lose patience may cause another large uptick in the oil price. We have heard that there is lots of interest in out-of-the money call options in oil. This suggests that some investors believe tail risk for the oil price is increasing.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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