Can Euro’s Rally Run Out of Steam?

The euro surged last week as the European leaders made some preliminary agreements about resolving the sovereign debt crisis. The improving sentiment about the ability of Japan to recover from the disaster also helped the currency. Can the shared European currency maintain its upward momentum this week?

The global situation looks positive for the euro. The good outlook for Japan’s recovery after the earthquake and the tsunami, as well as hope that the danger from the damaged nuclear plant will be contained, muted the risk aversion sentiment that shook markets in the first half of the previous week. The optimism weakened the safe currencies, including the US dollar and the yen, and made the euro more attractive. On the other hand, that same positive outlook strengthened the commodity currencies, like the Australian and the Canadian ones, more than the euro. The willingness of the Libyan government to end the conflict with the rebels peacefully also improved the market sentiment.

There were positive news from Europe itself. President of the European Central Bank
Jean-Claude Trichet confirmed his willingness to raise the interest rate in April. The European Union Economic Summit on March 11 provided some decisions to resolve the debt crisis, including the reduction of the lending rates for Greece. Yet the summit was preliminary and there will be a more important summit this week.

The downgrades of the credit ratings of Greece, Portugal and Spain showed that the EU economy still has problems and this can be very negative for the euro in the long-term. The military actions by the US and the European countries against Libya that began on May 19 may return risk aversion mood to markets, also potentially weakening the euro.

The outlook for the euro is quite uncertain it largely depends on the events worldwide and that’s really hard to predict. The sentiment about the recovery in Japan and the situation in Middle East can have substantial impact on the performance of the currency and these factors should be closely watched. The summit on March 24 should be even more important for the EU currency. Generally speaking, the euro has the strength to run higher for day or two, but it’s closing to the resistance level at which the previous rally has stalled. Perhaps the currency ran ahead of itself and some profit-taking may be performed at the second half of this week.

The previous rally of EUR/USD faltered at 1.4281 and this can be a strong resistance level for the currency pair. The support can be found at 1.3760, the level that was the January high and already has provided support earlier this month. Further down there is a level at which current rally had basically started — 1.3440.

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