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Euro dollar  is leaning lower once again, in the day after S&P put all euro0-zone nations under warning for a downgrade. This includes Germany’s AAA rating, as well as a warning for a two-notch downgrade for France. The warning came hours after the leaders of both countries announced an agreement. Tensions are rising towards the big summit on Friday. Will the euro continue lower?

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

EUR/USD Technicals

  • Asian session: A quiet session after the S&P bombshell saw the pair consolidating in range..
  • Current range:  1.3360 – 1.3420.EUR/USD Chart December 6 2011
  • Further levels in both directions: Below    1.3420, 1.3360, 1.3320, 1.3250, 1.3145. 1.30 and 1.2873.
  • Above:    1.3480, 1.3550, 1.3650, 1.3725 and 1.38.
  • 1.3360 is weakening after a first attempt to break lower. 1.3250 is the next critical line.
  • 1.3550 is strong support above, if 1.3420 is broken.

Euro/Dollar leaning lower- click on the graph to enlarge.

EUR/USD Fundamentals

  • 10:00  Euro-zone  Revised GDP. Exp. +0.2%. Revisions are rare here. Actual: no revision.
  • 11:00 German Factory Orders. Exp. +0.9%. Actual: +5.2% – positive surprise sent EUR/USD higher.
  • 15:00 US  IBD/TIPP Economic Optimism. Exp. 42.5 points.
  • 15:00 US FOMC member Daniel Tarullo talks.

* All times are GMT.

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

EUR/USD Sentiment

  • Everyone is warned: 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. The decision on a downgrade depends on the result of the summit on Friday. The move certainly looks as a political move to put pressure on the leaders before the summit.
  • Merkel and Sarkozy announce agreement: Just before the S&P bombshell, the leaders of France of Germany announced an agreement for tighter budget rules. The announcement lacked details, especially on utilizing the ECB and also on the situation in Italy. The rally was short-lived.
  • More coordinated action discussed:  Last week, 6 central banks, including the Federal Reserve and ECB, coordinated to lower the dollar swap rate, in an effort to prevent a credit crunch in European banks. This provided some relief for the euro, and reflected the severity of the situation. And now, there are talks that the Federal Reserve, along with euro-zone central banks (not necessarily the ECB), will lend money to the IMF, that in turn will supply money for debt struck countries.
  • ECB Finally Launching QE?: Another report that surfaced over the weekend discusses conditions under which the European Central Bank will provide (or print) a giant sum of one trillion euros, to lower the yields of Spain and Italy, allowing them sustainable funding. Stronger budget rules and strict enforcement are discussed. This can be the ultimate weapon to fight the debt crisis, but may weaken the euro as well.
  • Italian plan convincing markets for now: Italy’s Prime Minister, Mario Monti, presented new plan to balance Italy and reassure markets. Success of these measures as Europe enters a recession is doubted, as well as the ability to pass everything through parliament. But in the meantime, Italian yields are falling. Monti is a technocrat PM, and doesn’t have a political backbone. Berlusconi’s party already has doubts about the plan.
  • Spain struggling: Services PMI plunged to 36.8 points, the lowest level since March 2009. In addition, Spanish municipalities owe 3 billion euros to utility companies. This forced layoffs and adds to the misery. Yet similar to Italy, Spanish yields are falling.
  • Asia Pacific region slowing : Australia cut its interest rate once again, to 4.25%. This reflects the worries for the global economy. In China, official and independent manufacturing PMIs are moving lower. The HSBC figure points to significant contraction. Also China’s services sector, usually overlooked, is slowing and even in contraction according to some estimates. China reversed previous hikes and lowered the reserve ratio rate, allowing banks to lend more. This time, China will not be able to pull the global economy forward
  • Not all US figures are positive: 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.
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