German verdict relief for currency mkt, says ING

As the German Constitutional Court on Wednesday allowed the country to ratify the eurozone's new rescue fund and budget pact, Tom Levinson, Foreign Exchange Strategist at ING said, it has provided some relief to the market. Considering the decision as an important one, he is also contended with the fact that the euro rallied after the verdict was known. However, for the euro dollar to rally, there has to be significant action from the US Federal Reserve, feels Levinson.

Here is the edited transcript of the interview on CNBC-TV18. Q: What did you make of the German court verdict and were there any significant condition that you could note, the market reacting positively? A: I do not think there is any condition attached to it beyond what the market would have expected. There is certainly a degree of relief as we are seeing in the market moves right now from a currency perspective. The euro had softened up a bit going into the decision. It has since rallied. To be honest, that's far away from where we started. I think in broad terms the approval is important of course, it is very important on conditions that are attached to it. Probably, it is nothing beyond what one would have expected. Q: This 190 billion euro cap which the court has spoken about was already in place, does that prejudice or in some way decrease the weight of Draghi’s unlimited bond buying programme? A: The 190 billion euro is already established as Germany's share of 700 billion euro of total oil price capital stock as part of the ESM. I think essentially what the constitution clause says was that Germany cannot contrary what is already on paper and agreed. Anything else would of course have to come back to the court and probably be a bit of a struggle to get an approval. Yes, there has always been a situation surrounding Draghi's unlimited threat. Another way of interpreting the threat is like it makes unlimited purchases or probably going to make a purchase until the total size of the bond market of Italy and Spain. But the unlimited word was just to scare the market and show the intent that the ECB has. Q: What did you make of what Jose Manuel Barroso had to say? There were some wordings that the wires are carrying it that he spoke about a quantum leap in terms of banking union and ECB should be given overwhelming powers of governing all of the banks. Do you think that too has turned out to be a positive? A: I think this is one of the slower moving aspects over closer European coordination. It's not exactly where the market is focused right now. The focus right now is on Spain or Italy. Going around in the background, Europe had said that it wants to come out with more strategies on fiscal and banking union by the end of this year when they have a summit. All these things move in the right direction but at the end of the day probably it is only going to move the slowest members of the eurozone. Q: How do you think markets are going to react? We have seen 1% gain across most markets, DAX for sure and CAC up about 2/3rd or 0.7% and the euro is climbing towards 1.29, almost 1.288 was touched. Do you think this risk rally has got in all the good news or does this have more legs?
A: I think in the near term it probably will get more legs. I do not think that we are going to get huge reaction to this news today. Yes, it's a relief but it was by and large the expectation. So it is a little higher than where we started on euro dollar.
The bigger issue now for euro dollar and for the rest of this week is going to be the Federal Reserve's decision from the US tomorrow evening. The market wants to take the euro dollar higher for now, but there is also a reluctant worry of what is going to come out of the Fed tomorrow. If the Fed does deliver on a significant new policy easing, quantitative easing or QE3, that would be certainly a dollar negative and that would risk the euro dollar breaking up to 1.30 over the course of the next few days.