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The euro exchange rate is remaining to trade in range bound fashion

The euro continues to trade in range bound fashion, close to a 10 week high against the pound and a 12 week high against the US dollar ahead of the European Central Bank’s (ECB) second long term liquidity operation to bolster the euro zone financial system after the first highly successful LTRO in December 2011.

The LTRO, a three year discounted loan operation should support the banking system but the ECB has warned that today’s could be the last.

The move today should improve risk sentiment in the markets thus helping the high yielding riskier currencies like the Australian dollar which picked up ahead of the LTRO.

A drop in crude oil prices also fuelled demand for higher yielding, higher risk currencies. Crude oil futures have fallen by 3% in the last two days after hitting a nine-month high last Friday on concerns about the outlook for the world economy.

Yesterday, the ECB temporarily suspended the right to use Greek bonds as collateral in its euro system monetary policy operations. The ECB explained that the decision is based on Greece’s credit rating and the recent private sector involvement offer. The ECB notes that Greek debt could once again become eligible “upon activation of the collateral enhancement scheme agreed by the Heads of State or Government of the euro area on 21 July 2011, and confirmed on 26 October 2011, together with a number of other measures aimed at assisting Greece in its adjustment programme. This is expected to take place by mid-March 2012.”

The decision by the ECB comes after credit ratings agency Standard & Poor’s cut Greece’s ‘CC’ long-term and ‘C’ short-term sovereign credit ratings to ‘selective default’ due to the passing of the collective action clauses (CACs) that bind all bondholders to take a ‘voluntary’ haircut of 53.5% on Greek debt holdings.

In better news for the euro zone, data out yesterday from the European Commission showed that the euro zone’s economic confidence index for February rose by 1 point to 94.4, according to the latest data from the European Commission (EC), slightly ahead of expectations of 94.0.

Among the largest euro zone economies, confidence improved in France (+1.6 points), Italy (+1.0), and Germany (+0.1) but worsened in Spain (-0.2). The economic confidence index remains above the long-term average only in Germany.

“The improvement was broad-based across all sectors except for services, where a decrease in confidence partly offset the rebound observed in January,” the EC said in a press release.

This data from the European Commission along with the PMIs by Markit Economics are leading indicators used to analyse the economic cycle.

The euro has made good progress against the pound this month after a string of poor economic data out of the UK increased fears that the UK could be sliding back into a so called ‘double dip’ recession and last week, the minutes of the Bank of England’s Monetary Policy Committee meeting of 8 and 9 February showed that the highest policy making body in the UK is sufficiently worried about the economic outlook to hint at the possibility of a fourth round of Quantitative Easing (QE) being authorized in the coming months. By increasing the volume of money in circulation, QE devalues the currency.

The dollar has fallen against the euro, despite consistently better than expected economic data out of the US where there are sure signs of an economic recovery underway as demand lessens for the dollar’s safe haven status.