Why the euro may not benefit from the 750 billion euro emergency fund

[imperialfxonline]

Why the euro may not benefit from the 750 billion euro emergency fund

EARLY RALLY

The euro began the week on a good footing, gapping higher at the open in Asian trading following the rebound last Friday after it hit a one-year low earlier at 1.2523, the single currency was buoyed by the European Union's announcement that an emergency fund of 750 billion euros (which includes funds from the International Monetary Fund) and rose to as high as 1.3094 before falling and giving back its early gains.

NOT THE FIRST, OR LAST SIGN OF A BAILOUT

While investors around the world also bought equities on the implied stabilisation in the markets (they were spooked by last Thursday's sharp intra-day drop in Dow, even thought it was likely due to a trading glitch), sending major currencies higher versus the so-called safe haven currencies such as the dollar and yen, the euro by itself may not find much long-term benefit from the announcement. Only recently did European leaders agree to a 45 billion euro bailout plan for Greece, the most troubled of the eurozone nations and in need of funds as soon as May 19 to meet bond payments. For a much larger plan to be written up in relatively short time (albeit intended to cover the whole euro region), it suggests that the debt contagion may be worse than initially expected and a return to fiscal viability for European nations (including Portugal, Spain and Ireland) is also likely to take longer than predicted. Hence, the euro is at risk of being affected by more negative news out of the eurozone, especially in the form of more intervention to assist individual countries in need.

TRADING THE EURO

Analysing the currency markets and predicting future movements based on fundamentals can be complicated, even more so than using the traditional methods of technical analysis and the application of the Elliot Wave Principle. On Monday, the link between the rally in equities (improvement in risk appetite) and euro was severed as the single currency turned south in late trading, which puts low made last week at 1.2523 under threat.