Market Overview

Merkel Soothes Market with Payment Promises


Early Wednesday, the EUR/USD pair dipped below $1.27 as traders may have become concerned (yet again) over the currency's ability to persist.

Then, Italy's Mario Monti and Germany's Angela Merkel held a press conference Wednesday morning. Statements made in the press conference may have pacified currency investors, as the EUR/USD moved back above $1.27.

Italy's Prime Minister Monti made pro-austerity statements, saying that German discipline was the best method to resolve the crisis. Monti acquired his position from long-standing Italian Prime Minister Silvio Berlusconi after yields on Italian bonds moved into dangerous territory.

Monti also stated that Italians "broadly backed" tough budget measures, although given recent protests, Monti's statements may be seen to clash with reality.

Monti also stated that a favorable European framework was essential to restart growth in Europe, and that interest rates must go down to keep the zone intact.

Merkel—for her part—said that quick, substantive measures could help to strengthen Italy.

Still, perhaps the most important part of the press conference was Merkel's statements with regards to the funds available to help out the debt-saddled eurozone nations.

Merkel said that the European Financial Stability Facility still had 250 billion euros available. The EFSF was the temporary "bailout" mechanism designed to provide funding for eurozone members pressured by their overhanging debt.

Merkel also hinted that Germany could pay early into the European Stability Mechanism. The ESM is set to be unveiled later this year, and is designed as the successor and permanent replacement to the EFSF.

Paying into the ESM before its creation, said Merkel, would boost market confidence and stabilize the situation. Overall, she said that there was still much cash left in the European Union's structural funds "for growth."

While these comments may have been what the market is looking for, how much longer before the rhetoric becomes stale?

European officials have long been making promises to keep the zone intact, going back into last summer. Summits designed to resolve the crisis "once and for all" have taken place in October and December, and more meetings are scheduled in coming weeks.

With so much on the line, it seems unlikely that major European politicians would say anything too harsh. Still, at what point does the effectiveness of empty rhetoric become exhausted? When does real action finally become a necessity?

As US equity markets opened on Wednesday, the EUR/USD held near $1.27.

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