EUR rallied against its major counterparts on the last trading day of the first quarter after budget cuts in Spain boosted hopes the country could stick to an austerity path and European Union finance ministers meeting agreed to boost the scope of the euro zone’s firewall to over €800 billion. While EUR/USD was well contained within its weekly range, Japanese yen weakened against both the euro and the greenback.

Austrian Finance Minister Maria Fekter announced on Friday that the permanent euro rescue fund, the European Stability Mechanism (ESM), would be expanded, by considering the around €200 billion in current bailouts as being separate from the €500 billion earmarked for the ESM originally, the €500 billion figure was to have included the €200 billion in existing aid. The ESM (which is due to come into operation in mid-2012) will also be boosted by including around €100 billion in bilateral aid that was given to Greece in 2010, as well as aid from other EU funds, bringing the firewall’s total capacity to over €800 billion.

Fekter said that she was confident that this move would be enough to calm the financial markets. She said “The markets are already signaling relative calm. That shows that the markets can work with what we have set up here”. In fact, until now, Chancellor Angela Merkel and finance minister Wolfgang Schäuble only wanted to come up with €700 billion. The move marks another u-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. Lately Germany had come under massive international pressure to increase the size of the firewall so that it was large enough to potentially bail out countries such as Spain and Italy. However, firewalls will not solve the crisis. EU politicians can only solve the crisis by tackling the causes.

The coming week sees a number of important events: both the latest European Central Bank and Bank of England policy decisions; Federal Open Market Committee minutes; global PMIs; and the US employment report. The ECB meeting this week is unlikely to deliver any major surprises. Policy is expected to be unchanged, and it is only a month after the bank’s quarterly update of its medium term forecasts. President Draghi’s press conference will provide the focus. Market participants’ interest will be the ECB’s assessment of the LTROs impact on the real economy.

The latest data released by the Commodity Futures Trading Commission (CTFC) showed that the total number of contracts outstanding for major currencies dropped by 11% as investors pulled back from speculative bets. Speculative investors held a net $10.2 billion in bets against the yen, or 67,622 contracts, marking the largest short position in the yen since July 2007. For the euro, investors held a net $14.8 billion in bets that the common currency will decline in value against other currencies. The market held a net $1.1 billion wager against the British pound, down 30% from the week before.

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