This is the first substantial upside correction in the euro in the better part of two months. The euro’s move above its 20-day moving average puts momentum traders on alert. While the next target comes in near $1.2300, given the extended positioning and the pace of the losses in recent weeks, a short-covering fueled recovery can exceed technical objectives.
There was talk at the end of last week of some leverage fund interest in short-dated euro calls, with 1-month $1.25 strikes seemingly popular. The recent news stream has encouraged the short-covering. The ECB promised to provide unlimited liquidity over the next three months and this has helped ease some strains in the money markets. At the end of last week, Moody’s offered a fairly optimistic assessment of European banks’ ability to cope with losses related to their holdings of peripheral euro zone bonds. China and India’s recent string of data gave hope that the global recovery was intact despite the volatility of the capital markets. The ECB revised its forecast for euro zone growth to 1.0% (from 0.8%) and the Bundesbank revised up German growth to 1.9% this year from 1.6%. Earlier today the CBI lifted its forecast for UK GDP this year to 1.3% from 1.0%.
