Euro Boosted by Talk of Expanding Bailout Fund, Strong ZEW Report from Germany, & Russia's Interest in Buying EFSF Bonds

Last week we took a good strong look at the developments in the
Euro-zone, and following some successful bond auctions by troubled
Euro-zone countries – Portugal and Spain – we saw the EUR rally
strongly.

That momentum continued today as we had the EUR/USD rally to a 1-month
high at 1.3466, though it fell back down from that level in later NY
trading. We now test a zone of resistance in the pair which we had
been unable to break above since December.

*Traders Pricing in Bigger Bailout Fund*
The reason for the optimism was expectations that European leaders are
discussing some way to expand the European Financial Stability
Facility (EFSF) the 440 billion euro ($592 billion) rescue fund. We
had talked about last week how there were some limitations on how much
of that money could actually be lent due to the conditions on the
collateral needed.

The hope of investors is that the leaders will come together to expand
the facility's lending capacity or add to the overall figure and
perhaps even expand the role of the bailout fund. For instance one big
step forward could be to let the EFSF be used to purchase the
sovereign debt of troubled Euro-zone nations. While its not a
"bailout", by having another actor besides the ECB buying these
troubled bonds, it creates demand for them, and raises their price,
and more importantly lowering their yields.

Portugal for instance has said that if it has to sell 10-year
sovereign debt at yields above 7% it would be unsustainable.
With the build up yet again for some kind of change to the status quo,
we'll see if there is some results or if the currency market got
ahead of itself by sending the Euro higher.

*Germany ZEW Jumps to 6-Month High, Russia's Interest in Buying EFSF
Bonds*
We had 2 other positive developments for the Euro in todays trading
including a better than expected reading for German investor
confidence, as measured by the ZEW. The investor confidence index rose
to 15.4 in January – a 6 month high – from 4.3 the previous month.
We also had the announcement that Russia is willing to join Japan and
China in buying up the bonds issued by the EFSF.

*Weber Says Inflation to Peak at 2.4% in March*
In a third development we had the Bundesbank president Axel Weber say
that the ECB sees inflation rising past the ECB's target in the
short-term, hitting and peaking at 2.4% in March. He says however that
the rate will return below the 2% target in the medium term. That
gives us a bit of a guidepost in terms of what ECB policy makers are
thinking. If inflation stays below 2.4% we should see no hike from the
ECB, however, if CPI continues to creep up, we could see a rate hike.
That would be yet another Euro positive development.

Still, the EUR/USD pair may be a bit overstretched, and traders and
investors may be wary about pushing it higher. Therefore if we whiff
any kind of negative news for the Euro the rest of the week we could
see some Euro selling and profit taking (similar to what we saw
yesterday).
Source: Fxstreet.com