Euro dollar is now trading in a lower range, close to critical support, as Spain and Italy suffer in the bond markets. The euro also suffers from risk averse trade, as all signs point to a significant slowdown. Will it break to lower ground? Or recover from here?
Here’s a quick update on technicals, fundamentals and what’s going on in the markets.
EUR/USD Technicals
- Asian session: A quiet session followed the breakdown. The pair failed to break above 1.4282and fell to a lower range
- Current range 1.4160 to 1.4230.
- Further levels in both directions: Below 1.4160, 1.41, 1.4070, 1.4030, 1.3950, 1.3838, 1.37.
- Above: 1.4230, 1.4282, 1.4325, 1.4375, 1.4450, 1.4550, 1.4650, 1.47, 1.4775.
- 1.4160 support is the key for now.
- Note that significant support is above the round 1.40 line, at 1.4030, in case of another sharp drop.
- 1.4282 is of higher importance than the immediate cap of 1.4230.
Euro/Dollar trading in lower range – click on the graph to enlarge.
EUR/USD Fundamentals
- 9:00 European PPI. Exp. +0.1%. Actual 0%. Another sign of weakness in prices.
- 12:30 US Personal Spending. Exp. +0.2%.
- 12:30 US Personal Income. Exp. +0.3%.
- 12:30 US Core PCE Price Index . Exp. +0.2%.
* All times are GMT.
For more events later in the week, see the Euro to dollar forecast
EUR/USD Sentiment
- Spanish troubles: Spanish 10 year bond yields are raging at 6.35% at the moment, after hitting 6.45% earlier. This is too close to 7% – the magic number that sent previous countries to bailouts. But Spain is too big to bail. Spain is set for a downgrade very soon by Moody’s, as expected. General elections were pushed forward by the government, and they are expected in November now. In the meantime, Deutsche Bank ditches Spain and other countries in the periphery.
- Italian woes: Italian 10 year bond yields are at 6.18%, blowing in Spain’s neck. Also Italian bank shares continue to suffer. This is Europe’s third largest economy. Despite all the agreements, doubt about the results is beginning to appear. The EFSF (bailout fund) will probably have the powers to intervene in the bond markets only towards the end of the year. This is a very long time. German finance minister Wolfgang Schaeuble said he is “against a carte blanche for the euro zone’s rescue fund to purchase bonds on the secondary market”. This mechanism is the key for preventing further bailouts. Italy raised money in the markets, but had to settle for higher yields and a sum that was smaller than expected. It isn’t only the price of bonds, but this already affects new funding and may become unsustainable . There are worrying signs in Europe. Update: There are reports of an emergency meeting in Italy.
- Debt Hike Deal passes first hurdle: Intense negotiations towards the official “drop dead date” of August 2nd (which is today) came to a conclusion in the eleventh hour and a deal was announced and passed through the House. The Senate will now approve it, and it will follow for finalization at the White House. Things can still go wrong in the last moment, but the chances are slim. The limited compromise will likely send some of the rating agencies to downgrade the credit rating of the US, although we might have a split rating: S&P can lower the rating to AA, while Fitch and Moody’s might leave it on AAA. Some tough love for the US.
- Horrible US data: The American manufacturing sector is almost at a standstill. These are fresh figures for July, that provide hints for the Non-Farm Payrolls. This joins bad GDP data. Not only did the US grow less than expected in Q2 2011, but Q1 was unexpectedly revised to a growth rate of only 0.4%. This triggered worries that Ben Bernanke could hit the printing presses once again, with QE3, after ruling it out not so long ago. But for the euro, the situation now is that bad news from the US weigh on the euro as well – risk averse trading.
- Slowdown in growth and in prices: It is not only peripheral countries that are struggling. Also Germany and France have reported a significant slowdown in activity, in both manufacturing and services sectors. The fresh PPI data joins Flash CPI estimates released on Friday in showing that inflation has weakened. Will Trichet soften his tone?
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