Yet another fine mess in the search for a European solution

EURO-DOLLAR had another up and down ride yesterday. The release of better than expected Eurozone PMI composite figures gave the pairing an initial jump, but this brief optimisim that pushed euro-dollar up to $1.3062 quickly subsided when markets were reminded that the Eurozone is fundamentally more than a little shaky.

Finance ministers rejecting a 4 per cent interest rate on Greek notes as part of Private Sector Investment (PSI) negotiations may have caused some of the sell-off, but it was the ratings agency Standard and Poor’s that took the wind out of the sails of any euro-dollar bullishness by announcing that Greece could be downgraded to a “selective default”. Though this announcement triggered the usual “but is it priced in?” catchphrase from market commentators, the markets were quick to jump on an excuse to sell. “Ongoing talks between the holders of Greek debt and political leaders show once again just how difficult it is to reach agreement when so much is at stake,” says Angus Campbell, head of sales for Capital Spreads. “The stalemate is not helping the market to continue in the fashion that it has started 2012 and casting seeds of doubt in the minds of the bulls. Investors would rather see a resolution to the Greek debt issue quickly and the longer it lingers the more uncertainty there is about whether or not Greece will actually avoid a default and exit from the Eurozone.”

Aside from the Greek farce, France announced yesterday that it would be the first of the European financial suicide cult to take a bite from the cyanide-laced apple and impose upon itself a financial transaction tax – hoping that other European members would follow suit. President Nicolas Sarkozy hopes to introduce the tax before the end of 2012, with the aim of having it approved by parliament ahead of the French presidential elections.

Original proposals for a Tobin tax were based on levies on foreign exchange transactions – as a single member of the Eurozone, it is unclear whether France would even try to impose a tax on euro transactions.

As such, the news did not register on euro trading. Britain yesterday reaffirmed its opposition to the imposition of a financial transactions tax, though if France chooses to do so, London is likely to be the biggest beneficiary.

The Federal Reserve’s two day monetary policy meeting will conclude today and euro-dollar will likely follow form by trading flat in the run up to the crucial FOMC press statement. For the first time, the Fed will provide projections for the Fed funds rate based on the individual members’ forecast – the Fed report will now include the range of FOMC members’ projections of the timing of the first hike and fourth quarter forecasts for the Fed funds rates for the next two years. As such, traders will be hanging on every word for the timing of the rate hike – will it be late 2013 or early 2014?

The announcement has the potential to give a short boost to the dollar, but given the market’s already bullish dollar position, this will be short lived. According to FXCM’s Alejandro Zambrano, the majority of their clients are positioned for a stronger dollar, which is also support for their long term view. “If the euro remains below $1.31 after today’s FOMC meeting, traders will position themselves for a decline to $1.27 later this week.”