EUR/USD Surges on Extra European Funding

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EUR/USD Surges on Extra European Funding

EUR/USD Spread Betting Market Surges on Extra European Funding

The markets are waiting in anticipation ahead of tomorrow's second round of quantitative easing from the ECB.

The second round of the ECB's Long-term Refinancing Operation (LTRO) will see roughly another €500bn of cheap capital waiting at the shop window for European banks.

Round one of the LTRO was a success as far as the ECB is concerned - a success because, so far, Europe has managed to avoid another credit crunch.

At the same time it has succeeded in bringing down the bond yields on peripheral government debt, fuelling investor confidence, and is one of the main drivers behind the recent strength in equity markets.

No one knows how the markets will react to tomorrow's fund release. Some investors are saying that a low number could be seen as insufficient whilst a high number could be seen as confirming that European banks are still very ill indeed.

As we have seen with UK shares, the current reporting season has told us that banks are still sick, but not as sick as they were. Profits may be down, and bonuses might still be being paid out, but the colossal size of some of these balance sheets is being addressed.

The riskier assets are being downsized or sold off and the capitalisation of banks is stronger following pressure from politicians and regulators. From the work that's been done up to now, and with the help of the stimulus from central banks, the banking sector is a little safer than it was a few years ago.

So we wait to see the outcome of tomorrow's fresh round of ECB loans. If the first round is anything to go by, we can expect to see banks queuing up to get their hands on the cheap loans.

It's a no-brainer when you can get a three year loan at 1% and buy a three year Italian or Spanish government bond that's yielding around 3%.

Driving the cost of borrowing down for these countries is assisting in repairing a very broken Eurozone, certainly over the short-term.

In the long-term many European countries will remain hugely indebted and if there isn't more improved growth, then it will be near impossible to rectify.

Having said that, risk appetite is still evident in the markets, with risk assets like metals and the euro performing well towards the end of yesterday's session.

On the forex spread betting markets, the euro struggled initially against the dollar and had fallen to the day's low of $1.3363 by mid-afternoon. However, this didn't last long and the single currency surged in anticipation of the ECB cash injection tomorrow.

This could easily set the tone for the rest of the week for the euro. Currently the EUR/USD spread betting market is trading at $1.3460, with resistance at $1.3485.

By Simon Denham, 28 February 2012

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