EUR/USD

The Euro encountered strong support below the 1.3650 level against the Dollar on Wednesday and strengthened to highs above 1.3750 towards the close of trading. There was a degree of relief over the Greek debt situation and the threat of default, as the government pledged to increase austerity measures through additional spending cuts.

There were still major concerns about whether the government would be able to deliver the cuts considering the extent of divisions and popular discontent but the move helped provide near-term support to the Euro. There were continuing fears surrounding the banking sector as underlying stresses persisted. The IMF estimated that at least €200 billion would need to be raised and there were fears over the level of debt at French banks.

The latest FOMC statement said that the Fed will be buying $400 billion in longer-dated securities in the period until Mid 2012 through the selling of shorter-term securities. The Fed also announced that it would target mortgage-backed securities in an attempt to keep mortgage rates down. There was, however, no introduction of further quantitative easing measures at this stage with the Fed remaining downbeat on the economic situation.

Global stock markets fell sharply following the meeting, triggering a sharp deterioration in risk appetite and pushing the Dollar stronger against the majority of the 16 most actively traded currencies. The Euro came under fresh selling pressure yesterday, retreating sharply to lows near 1.3420, the lowest level since February.

Underlying confidence in the Euro-zone economy will continue to deteriorate and there was additional pressure for more decisive action at the IMF and G-20 meetings over the weekend. There is continuing speculation that Greece would default and there are concerns over the Euro-zone banking sector that will continue to undermine the Euro.