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EUR: Could be Slightly Oversold on Political Uncertainties

The Reserve Bank of Australia, (RBA), left their rates unchanged at 3% as the first of this week’s trio of central bank decisions, (BOE and ECB on Thursday) was released last night. However, policy makers suggested in the accompanying statement that their is a possibility of a rate cut later this year as a struggling job market is hindering the economy. The statement was considered dovish, as the growth outlook was not changed much since the December statement. The AUD has been pushed lower since the announcement, briefly trading below the 1.0400 handle.

Political uncertainties in Europe kept pressure on the equity markets overnight as the Nikkei and Hang Seng indices both followed the DOW lower overnight. The problems that are coming to light in Italy and Spain pushed EUR through the 1.3470 level overnight.  A newspaper in Spain is reporting that PM Rajoy received illegal funds, and Rajoy is facing calls from the opposition to resign.

He received a vote of confidence yesterday from German Chancellor Merkel. Unfortunately, for Rajoy, Germans do not vote in Spanish elections. Adding to the woes of the EUR, there is concern in Italy over the rise of former PM Berlusconi. He is being accused of using “dangerous electoral propaganda”. He is pledging to ease taxes if his coalition government is elected later this month. In a speech he states that taxes cause worry, anxiety and fear and he would ease these worries if elected.

The EUR has once again proven that good economic news has a way of trumping bad political concerns. The release of EMU PMI this morning has rallied the single currency from its lows to almost reaching the 1.3550 level. EMU composite PMI rose from 47.2 to 48.6 in January, beating the consensus number of 48.2. German PMI Services remained above the 50 level rising to 55.7 from 52.0, beating the consensus number of 55.5 and Spain came in at 47, beating consensus at 44.1. Italy did not fair as well dropping to 43.9, instead of the expected 45.8, while France came in as expected at 43.6. The 50 level separates expansion from contraction we can see most of the Euro zone is still contracting. However, Germany as the lead economy is trying to lead the Euro zone out of its doldrums.

Technically, the EUR is in a bit of flux. A true break below the 1.3485 level is needed to confirm the downside and target the 1.3430 level. There is resistance at 1.3540 and only a close above the 1.3580 level would return the EUR to an upward move.

Having risen from the 1.2000 level last July to the 1.3700 level last week, there was an expected downside move, so the last 24 hours of trading is not surprising. The question now is whether the political uncertainty that has crept back into the EUR market is strong enough to eclipse the possible resurgence of the Euro zone economy. This uncertainty give more importance to the comments made by ECB President Draghi following their meeting on Thursday. There have been some rumors that he will comment about the recent surge in the EUR and that these comments will be more on the dovish side. These concerns will weigh on the EUR for the next few days.

Look for consolidation of the EUR during the North American trading session with emphasis on the downside. There may be a slightly oversold bias at the moment, so bounces higher would not be surprising. The break overnight of the 1.3470 level may have triggered selling and the PMI releases have some traders likely in bad positions at the moment. We shall see how this plays out.

Further reading:  EURUSD Update II: Bearish Reversal- Respect the Price Action (Elliott Wave)

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.