Euro Might Fall After the EU Finance Ministers Meeting

By TraderVox.com

Tradervox (Dublin) – The Euro has been on a bearish run against major currencies this week due to the eurozone finance ministers meeting today which is expected to endorse a plan to combine the European Stability Mechanism kitty with that of European Financial Stability Facility. This will be done in a bid to strengthen the region’s financial firewall safeguarding the region’s economy against any crisis like the one for Greece. The idea of combining these two facilities had been vehemently contested by Germany and Ireland; however, these two countries have softened their stand and now they are willing to comprise in order to secure the currency bloc.

Currently the EFSF has 248 billion Euros out of its total capacity of 440 billion Euros. The ESM is set to have 500 billion Euros lending capacity and it is expected to take over from the EFSF completely. Therefore, it is expected that the Final ESM would have 500 billion-Euro capacity which include the amount that has already been utilized by the EFSF leaving only 308 billion Euros at the disposal of the newly created entity. Analysts are warning that this would lead to a less favored outcome that is likely to exert downward pressure on the euro.

Since this option is less favorable for the region, another version, which is a bit optimistic and opposed by Germany is letting EFSF and ESM to run concurrently, meaning that the kitty would amount to 748 billion Euros now, as 192 billion Euros have already be used from the EFSF kitty. The third scenario which might be acceptable is to let the EFSF and ESM to run concurrently up to then end of June when the EFSF expires and thereafter to continue with the ESM which has a capacity of 500 billion Euros.

Since the third option has been agree upon across the market, this might be the likely scenario outcome which will be against the traders’ expectation precipitating a scenario of “buy the rumor, sell facts.” It should also be noted that the high inflation rate, which despite lowering to 2.6 percent still remains above the ECB target, will affect the demand for the euro after the meeting.

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