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Euro dollar  is holding on to critical support after the big fall yesterday. It’s a busy day today, with the Fed decision seeming the most important event. But, more bad news about Commerzbank or any additional  repercussion  from the EU Summit could tip the pair lower. Will we see another big breakdown now? Or will we see a recovery?

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

EUR/USD Technicals

  • Asian session: Quiet session after the downfall, with a failed attempt to break above the 1.3212 line.
  • Current range:  1.3145 – 1.3212EUR/USD Chart December 13 2011
  • Further levels in both directions: Below 1.3145. 1.30, 1.2920, 1.2873 and 1.2580.
  • Above:    1.3212, 1.3280, 1.3380, 1.3420,  1.3480, 1.3550 and 1.3650.
  • 1.3145 is the low of October 4th. A break below this level will send the pair towards levels last seen in January.
  • 1.3212 proves to be strong resistance, preventing a return to the previous range.

Euro/Dollar at critical support- click on the graph to enlarge.

EUR/USD Fundamentals

  • 6:30  French CPI. Exp. +0.3%. Actual +0.3%.
  • 10:00  German ZEW Economic Sentiment. Exp. -56.1 points.  See how to trade this event with EUR/USD.
  • 10:00 Euro-zone ZEW Economic Sentiment. Exp. -60.3 points.
  • 13:30 US Retail Sales. Exp. +0.6%. Core sales exp. +0.5%.
  • 15:00 US Business Inventories. Exp. +0.7%.
  • 15:00 US  IBD/TIPP Economic Optimism. Exp. 42.5 points.
  • 19:15 US rate decision – no changes are expected in the last meeting of the year.

* All times are GMT.

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

EUR/USD Sentiment

  • Commerzbank on the edge: Germany’s second largest bank is in  intense  talks with the government regarding emergency aid. A fall of this bank could trigger a domino effect via Credit Default Swaps. This is one of the 7 reasons for the recent downfall.
  • No action expected from the Fed: Ben Bernanke and his colleagues are likely to leave policy unchanged. While a few members are expecting more action and can lean on the deteriorating situation in Europe, the signs of improvement from the US economy keep the committee balanced. QE3 is possible, but somewhere in 2012, depending on the economy.
  • Bond auctions weak after EU summit: The leaders of 26 out of 27 countries agreed on treaty changes enforcing stricter budget rules. This not only excludes Britain, but also has a long timetable. Regarding the permanent bailout mechanism, the ESM, its size hasn’t been enlarged. Similar to the ECB’s move (see below), the leaders failed to address current affairs. If the leaders are still playing a game, this is a dangerous one. Italian yields are rising to 6.50% once again. These are unsustainable levels, although this is the secondary market. A short term bond auction in Italy got better yields than a previous one, but still high. Today we have a short term Spanish auction.
  • Will S&P downgrade France and Germany?: In a move that shocked markets, credit rating agency Standard and Poor’s  warned all euro-zone countries, apart from Greece, that their rating is endangered. Some countries, such as Germany, got a warning about a one-notch downgrade, while  France, Italy, Spain and others received a two-notch warning. In what seemed like a political move, S&P said that the action will depend on the EU Summit results and that it will publish its decision “as soon as possible”. Markets remain tense. Moody’s and Fitch also added their warnings.
  • Draghi drags markets down: In one of the busiest rate decisions seen for quite some time, the ECB lowered the interest rate to 1% as expected, eased collateral rules for banks and offered 3 years loans. But on the other hand, ECB president made it clear that the ECB would not scale up its bond buying. So, Italy and Spain continue struggling and the euro falls. One ECB member said the central bank could scale up bond buying, but reality remains different: the ECB scaled down bond buying to less than one billion euros last week.
  • Greeks withdraw money: The pace of withdrawals from Greek banks intensified recently, as the chances of leaving the euro-zone rose. This Greek bank run could bring down the system.
  • More good data before FOMC: Weekly jobless claims returned to providing hope for the US, dropping to 381K. In recent weeks, most US figures have been positive. This is also reflected in the all-important job data. The US continues to gain jobs at a nice pace, with the unemployment rate falling to 8.6%. On the other hand, the services PMI dropped and also factory orders fell. This is somewhat disappointing, although US PMIs still reflect growth. The Federal Reserve will publish its rate decision tomorrow. The last meeting of the year isn’t expected to result in new decisions, especially as the FOMC is currently split between hawks and doves.
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