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By FXCompass — Monday, 12 April 2010

Risk sentiment has switched to the upside in the forex market now that a €45 billion EU/IMF aid plan to Greece is on the table.

Despite the euro’s rebound, the fundamental outlook in Europe remains fragile. The financial status of other European countries such as Spain and Portugal keeps sovereign risk on the radar. The recent downgrade of Portugal’s and Greece’s credit rating pushes a full recovery to much later.

In the U.S, employment continues to stabilize but remains very far from pre-recession levels. Hence, the Federal Reserve stays cautious and pledges to keep a low interest rate for an “extend period”. Although some economical data such the GDP and Retail Sales have shown good signs of recovery, the housing market remains fragile and employment numbers have not appreciated enough to justify a rate hike.

Commodities are still on the up move and prevent any significant retracement in the Canadian dollar or the Australian dollar. Last week, oil reached its highest level since October 2008 which pushed the Canadian dollar to parity for the first time since July 2008.

The Reserve Bank of Australia supports its currency by increasing its Cash Rate once more by 0.25 basis points to 4.25%. Australia’s economy profits from growth in Asia, however the aussie suffers from occasional risk-aversion selling and from China’s threat to counter its own inflation.

In the UK, investors are under the influence of the political campaigns for the May legislative elections. The pound is stuck between the improving European sentiment and the incertitude that builds up as we approach elections.

We expect the dollar to remain well supported in the short to medium terms.

With the new EU bailout, we expect the euro to consolidate or push higher in the short term on any new positive developments coming from Greece.

We also expect central banks to remain cautious and keep their interest rates at exceptionally low levels until at least mid-year.