Home Shadow of Spain and Italy looms over the Euro zone

Shadow of Spain and Italy looms over the Euro zone

As anyone with any experience of the Foreign Exchange markets will tell you, just as we manage to convince ourselves that something is about to happen or will continue to happen (e.g a trend or theme developing or continuing ) then the market, for whatever reason, does an about turn and catches you out.

And so it was Monday, as “risk” was definitely “off”’ as stocks were hit hard on the back of Spanish and Italian woes.

This is a contribution by Richard Wiltshire, Chief Foreign Exchange Dealer at ETX Capital, a  UK spread betting provider.   We provide trading on forex, equities  and other markets.

Whilst buoyant stock markets, improving PMI readings and an ECB tolerant of a stronger currency has resulted in a more bullish market view on the EUR over the last few weeks, we should know by now that a political concern is never far away when it comes to the Euro zone and, despite much optimism, it tells us something about how nervous this market is; the way it runs for cover (and in to perceived “safe havens”) when any negative news appears.

The political situation in Italy is something of a farce.   Even the contemplation that we may see a return to power for Berlusconi, is almost unbelievable (the likelihood of a Berlusconi win is small, but he has historically been able to get 3-4% more support in the actual vote than the polls suggest, and he is currently only circa 6 % behind Bersani).   If you made up this story no one would believe you!

Meanwhile in Spain, responding to allegations of having received questionable payments amid worries about political corruption, Prime Minister Mariano Rajoy worryingly insisted “it is all untrue – except for some things (the media has published)”.   Not exactly the way to quash rumours outright.

These “jitters” ,in combination with profit-taking ahead of tomorrow’s ECB meeting and Hollande’s comments on Tuesday where he issued a clear warning over the current strength of the Euro damaging the European economy, should likely see the EUR remain a sell on rallies.

There is much speculation that the upcoming ECB meeting will see Mario Draghi (ECB President) try and talk down the Euro, leaving room for rate cuts etc.   However, as Mr Draghi himself stated, at last month’s press conference, “so far, both the real and the effective exchange rate of the euro are at their long-term average” which in turn has been backed up by Nowotny’s comments of only a week ago that EURUSD “remains within a normal long-term range”, both of which suggest to me that the message from the ECB will remain the same, with all avenues left open.

Tuesday saw a lively open where macro name EUR/USD demand set the tone for an early session rally (allied to Middle Eastern names buying euro/yen) which took EUR/USD from the 1.3460 lows and stronger Spanish and German PMI data sparked more short covering, as EUR/USD regained a foothold above the 1.3500 handle to run stops and take out some offers at 1.3525/30. Only for the rally to stall against supply above 1.3540/50 and drift off to the 1.3520 area as Hollande’s comments that the Euro zone needs a foreign exchange policy, hit the wires.

The focus will remain firmly on the Euro kin the next 48 hours, with all eyes on ECB as near term trading conditions are likely to remain “rangey” given the proximity of key resistance levels, but with the medium bullish theme still intact.

The examination of EUR/USD true credentials will come on any test of the 1.3790/1.3835 zone, but short term resistance at 1.3575/00 needs to be cleanly breached first while 1.3450/60 and 1.3390/00 levels should act as key initial supports.

Buona fortuna!