FOREX-Euro still downcast; Aussie focused on CPI

by on July 24, 2012 11:35 pm BST

Tue Jul 24, 2012 7:35pm EDT

* Euro zone debt crisis still weighing on risk appetite

* Talk of Fed moving closer to QE3 overshadowed for now

* Aussie eyes CPI data due at 0130 GMT

By Ian Chua

SYDNEY, July 25 (Reuters) – Investors continued to give the
euro and risk currencies a wide berth on Wednesday following a
selloff in global stocks as worries about the euro zone debt
crisis festered.

EU officials said Greece had little hope of meeting the
terms of its bailout, while Spain’s borrowing costs jumped to
painfully high levels, fuelling fears for the region’s

The euro, which slumped to a fresh two-year low around
$1.2042 overnight, was last at $1.2065. It remained on
track to test the 2010 trough of $1.1876.

Against the yen, the single currency fetched 94.26
, having carved out a new 12-year low of 94.12. The
euro, though, managed to recoup lost ground against high-beta
currencies like the Australian dollar. It was last at A$1.1804
, recovering from a dip to A$1.1729.

Markets reacted cautiously to a Wall Street Journal article
saying U.S. Federal Reserve officials were moving closer to
taking new steps to spur activity and hiring.

“This is in line with our economist’s expectations and we
expect that the market moving towards this view to lead to a
reversal of the USD’s recent rally,” BNP Paribas analysts wrote
in a client note.

They said based on their fair-value models, the euro looked
substantially undervalued across the board following its
underperformance in recent weeks.

“We recommend going long EURUSD, targeting a return to fair
value of 1.2420 with the stop loss at 1.1870, slightly below the
5 year low of 1.1877,” they added.

Delivering yet more bad news for Europe, Mood’s changed the
outlook on its provisional top-notch rating for the European
bailout fund to negative. The action, though, was expected given
its move earlier in the week to slap a negative outlook on
Germany, the Netherlands and Luxembourg.

With the euro on the backfoot still, the dollar index
remained near a two-year peak of 84.100 set overnight. Against
the yen, the greenback traded at 78.17, holding above a
7-week trough around 77.94 set early in the week.

The broadly firmer greenback saw the Australian dollar
retreat to a 1-1/2 week low of $1.0211. It is flirting
with the lower-end of its uptrend channel drawn from the June 1
low and the 100-day moving average at $1.0195.

The Aussie’s near-term outlook hinges on consumer inflation
data due at 0130 GMT. Markets expect a very tame outcome, which
should leave the door wide open for the Reserve Bank of
Australia to cut interest rates again if needed.