In US trade, both the euro and the pound retreated off their recent highs as investors braced themselves for key event risks later in the week.
While the German Constitutional Court was set to rule on the ESM on Wednesday, German lawmaker Peter Gauweiler asked the Constitutional Court judges to block ratification of the ESM or postpone the ruling. The court said it would likely issue a release later today.
Although most do not believe the Court itself will block the ESM in its entirety, scrutiny over various details may yet prompt a renegotiation of the Treaty to the detriment of euro. Potential delays/renegotiations were no doubt partly attributable to the euro’s retracement overnight from 1.2785 at the close of the Australian session to its US settlement at 1.2758. Also potentially weighing on both the euro and the pound was general nervousness ahead of Friday’s FOMC meeting. While the market seems to have grown increasingly confident that the Fed will embark on a fresh round of asset purchases, there is still a sizable degree of scepticism, and no one wants to be on the end of the ‘disappointment trade’ which will undoubtedly involve dollar strength/risk currency weakness.
While the German Constitutional Court ruling (delays or otherwise) will be important, everything else in the lead up to the Fed decision is just a distraction. In early Asian trade both pairs are marginally firmer than their US closing levels at 1.2767 and 1.5997 respectively.