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Investors dumped euros ahead of Wednesday’s European Union summit. After rallying for 2 consecutive trading days, the euro failed to sustain its gains which tell us that investors do not expect much from the meeting.
If Merkel shows any willingness to compromise with Hollande’s demands, EUR/USD will rally but if she refuses to budge even an inch on Eurobonds, the EUR/USD could come under further selling pressure.
"Within this packet of proposals there will be eurobonds and I will not be alone in proposing them. I had confirmation on this at the G8."
http://uk.reuters.com/article/2012/05/21/uk-euro-summit-idUKBRE84K09620120521
Thanks to the rebound in stocks and the lack of newly negative news for Greece, the EUR/USD rose above 1.28 for the first time since last Tuesday. The recovery is tenuous at best and there are no shortages of reasons for why investors will want to continue selling euros but with EUR/USD short positions at a record high according to the latest CFTC IMM data, it won’t take much to trigger a short squeeze even if the longer trend is still downwards.
This morning, all of the major stock market indexes are rebounding higher today. It is important to note that all of the major stock market indexes are severely oversold in the near term, therefore, a short term bounce is overdue. The catalyst for the rising stock market is undoubtedly the weaker U.S. Dollar Index. As we should all know by now, when the dollar dips the market flips. Most leading stock sectors are catching a bid higher as the U.S. Dollar declines and this tells us that most sectors trade inverse to the dollar. Traders must be on watch if the U.S. Dollar Index rises or catches a bid later, the major stock indexes could come under pressure again and give back the early gains. As I always say, every trade is a trade on the U.S. Dollar Index.
http://www.inthemoneystocks.com/free-services/rant-rave-blog
After last week's blood bath in the currency and equity markets, the lack of high profile meetings or major event risk on the calendar this week has driven volatility in the FX markets lower.
