EUR/USD Aug 8 – Rallying on Massive ECB Move

Euro dollar  is rallying strongly, after Trichet finally pulled the big guns out and began buying Italian and Spanish bonds, massively. The effect of the US downgrade is expected in some form of G-7 coordinated action, which is still to be seen. Where will it go after these big events?  

Here’s a quick update on technicals, fundamentals and what’s going on in the markets.

Update: Massive is an understatement: Spanish yields on 10 year notes fell to 5.25% – below the crisis levels. Madrid’s stock exchange is rallying. Italian 10 year note yields are at 5.35% – a drop of 12%.  The euro is somewhat hesitant.

Update 2: The gains have been erased, as clouds mount above the Berlusconi-Trichet deal.

EUR/USD Technicals

• Asian session: A very active weekend resulted in a busy session – the pair opened just under resistance at 1.4450, fell to close the gap above 1.4282 and is now breaking higher once again.
• Current range 1.4375 to 1.4450.

• Further levels in both directions: Below 1.4375, 1.4325, 1.4282, 1.4220, 1.4160, 1.4070, 1.4030, 1.3950, 1.3838.
• Above:    1.4450, 1.4550, 1.4650, 1.47, 1.4775, 1.4882, 1.4940.
• 1.4450 is the key line on the upside, after working as such also at the beginning of the previous week.
• Gap line at 1.4282 (also a historic peak) is the key on the downside.

Euro/Dollar sliding lower  – click on the graph to enlarge.

EUR/USD Fundamentals

• 8:30 European Sentix Investor Confidence. Exp. 3.6 points.

* All times are GMT.

For more events later in the week, see the Euro to dollar forecast

EUR/USD Sentiment

• Trichet boosts the markets: After moving in a half-hearted way and sending global markets lower, the ECB finally provided the necessary intervention in the markets, following an emergency meeting on Sunday. This one is serious – Italian and Spanish bond yields fall over 10%, and both are under 5.50%. This is a dramatic change from last week’s painful highs that became unsustainable. Trichet managed to get significant promises, especially from Berlusconi. This move was long awaited – the ECB is the only factor with tools to act at this moment, while the changes to the EFSF are awaited. Note that if the bond buying is indeed massive and unsterilized, this is actually a form of quantitative easing – euro printing, that could eventually flip against the euro.
• S&P Downgrade of the US: The historic downgrade of the US had the expected initial impact on currencies. There have been emergency discussions among G-7 and G-20 officials, which have spoken about coordinated action following the downgrade – action to calm markets. At the time of writing, serious action is still awaited.
• A positive Non-Farm Payrolls report for a change: After so many US figures disappointed, the jobs report was finally OK. The US economy created 117K jobs and a small drop in the unemployment rate was seen. When the dust settles from the ECB intervention and the credit rating downgrade, this important figure, as well as more data awaiting us later this week on both sides of the Atlantic, will return to dominate.