Euro recovers after falling on Ireland downgrade

LONDON - The euro rebounded on Monday from early lows hit after Ireland’s ratings downgrade and the suspension of talks between Hungary and international lenders, but traders remained wary ahead of bank stress test results.

By (Reuters)

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Published: Mon 19 Jul 2010, 6:19 PM

Last updated: Thu 2 Apr 2015, 9:43 AM

Traders said semi-official demand was helping to push the rate back above $1.2900, while a large buy order from the Middle East, executed through a major U.S. bank in London, had helped euro/dollar to a session high of $1.2991.

By 1048 GMT, the euro was trading up 0.2 percent versus the dollar at $1.2965, steadying off a session low of $1.2872.

But analysts said a recent rebound in the euro, which hit a two-month high of $1.3008 on Friday, may have been overdone.

“The euro’s recent strength has been exaggerated by positions, as people scale back from extremely short (euro) positions,” said Raghav Subbarao, currency strategist at Barclays Capital.

“As people square positions, we don’t see much further upside from here.”

Latest data from the Commodity Futures Trading Commission showed speculators have been increasing long positions in the yen and cutting longs in the dollar, especially against the euro and pound..

The International Monetary Fund and the European Union suspended on Saturday a review of Hungary’s funding programme, putting some pressure on the single currency.

“The impact of the Ireland downgrade was muted as Moody’s kept a stable outlook. But we expect euro/dollar to remain capped and think the stress tests will provide the last chance to sell the euro again,” said Manuel Oliveri, currency strategist at UBS.

Stress tests

Traders highlighted option expiries in the euro at $1.2970 and $1.3000, potentially hampering the currency until they rolled off at 1400 GMT.

Technical analysts saw near-term support at around $1.2850, the 50 percent retracement of the euro’s fall from a high near $1.3820 on March 17 to a four-year low of $1.1876 in early June.

Market players awaited the results of stress tests on 91 European banks due on Friday.

“We expect the stress test to be well received but its main effect on the euro will be to reduce the probability of a large downside move,” Barclay’s Subbarao said.

“Any initial move higher should be limited and we feel euro/dollar will move lower over time.”

Greece’s central bank chief said he expected the country’s lenders to smoothly pass European Union stress tests.

Against the yen, the euro was up 0.8 percent at 112.84 yen. Traders said the cross yen pair was attempting to climb back into its daily Ichimoku cloud for the third straight day, but was so far capped by Japanese offers placed ahead of the cloud base at 113.14 yen, traders said.

It has not managed to close within the cloud since early May. The cloud top is some way off, coming in at 117.97 yen.

The dollar was up 0.5 percent versus the yen at 87.03 yen, bouncing back from a seven-month low of 86.27 yen hit on Friday on EBS.

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