Forex Europe Review – Euro strengthens on risk appetite and bank recapitalization plans

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EURUSD rallied to its highest level in over a week as risk appetite returned today following a pledge by Germany and France to deliver a plan before the G20 Summit in three weeks to recapitalize banks and find a “durable” solution to the Greek debt crisis. Meanwhile a deal has been reached to rescue Belgian Dexia bank which the Belgian government will nationalize. Such a move will help prevent contagion to the region’s banks and avoid a banking crisis. Some positive euro zone economic data helped buoy the euro. Germany had a trade surplus in August and French and Italian industrial production rose more than expected in August. EURUSD climbed steadily from the session open of 1.3470 to a high of 1.3636.

GBPUSD hit a high of 1.5663, its highest since the end of September. Cable took direction from the EURUSD pair due to a lack of new UK data today so the pound was largely driven by risk appetite. A softer US dollar also helped buoy sterling, since US markets were closed today for the Columbus Day holiday, resulting in light USD volumes.

The Canadian dollar extended gains against its US counterpart from late Friday’s US session. The loonie strengthened last Friday after Canada’s unemployment rate was pushed lower to 7.1 percent in September from 7.3 percent in August . Also crude oil has been rising steadily for a week now, gaining over US$1 a barrel. Canada is a major oil exporter and the Canadian dollar is commodity-price sensitive. Improved risk lessened the need for the safe haven greenback, leading USDCAD to fall 1.0270.

EURJPY was given a lift by EURUSD strength and risk appetite, climbing to 103.42 from the European open of 102.81. USDJPY was pressured by overall dollar weakness early in the session. After falling to a session low of 76.56, the pair soon recovered losses and bounced to 76.75 on bargain buyers and fear of a BoJ intervention if yen appreciates too much against dollar.

USDCHF fell sharply in European trading, falling from 0.9233 down to 0.9022 as the dollar came under broad selling pressure on an improvement in risk sentiment following a German and French pledge to formulate a plan to tackle the euro zone debt crisis by the end of the month. Also, traders are repositioning and unwinding long USDCHF positions to take profit. USDCHF had reached too high on technicals, and was due for a correction. Earlier in the session, the pair had hit a 4 ½ -month high on speculation that the SNB would move the cap on the EURCHF from 1.20 to 1.30 franc. This also lifted EURCHF to a near 5 -month high of 1.2434 but was unable to sustain such a high and fell back down to 1.2302.