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Euro dollar  opened in a narrow, lower range, after the big events of Friday. France and Austria lost the perfect AAA rating, weakening the bailout fund. The lower rating will be tested today, as France raises money in the markets. Regarding the recipient of the big bailout, Greece, things are deteriorating as well: PSI talks broke up and banks are short of cash. Will we see another leg lower on this US bank holiday?

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

EUR/USD Technicals

  • Asian session: An active session saw a new drop under 1.2660 and trading above 1.2623.
  • Current range:  1.2623 to 1.2660.EUR/USD Chart January 16 2012
  • Further levels in both directions: Below   1.2623, 1.2580, 1.2520, 1.24, 1.2330 and 1.2144.
  • Above:   1.2660, 1.2760, 1.2873, 1.2945, 1.30, .13060 and 1.3145.
  • 1.2660 switches from a double bottom to immediate resistance. Really strong resistance is only at 1.2873.
  • 1.2623 is a stepping stone towards 1.2587.

Euro/Dollar in low ground- click on the graph to enlarge.

EUR/USD Fundamentals

  • 7:00  German WPI. Exp. +0.3%. Actual 0%.
  • 14:00 France plans to sell 8.7 billion euros of short term bills.
  • 18:00 ECB president Mario Draghi testifies in  Strasbourg.

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

EUR/USD Sentiment

  • Greece deteriorates: Partially overshadowed by the downgrades, the situation in Greece worsened in two aspects: the talks about a 50% private sector haircut for Greek bonds broke down – this is a key element for Greece’s second bailout program. In addition, a fresh report about Greek banks showed a shortfall of 15 billion euros, worse than estimated. These events aren’t fully priced in.
  • Multiple Downgrades: S&P finally made the move. The rating agency cut credit ratings of 9 euro-zone countries, stripping the perfect AAA rating from Europe’s second largest economy, France, and Austria, which was also part of the AAA core for the bailout fund. Italy’s two notch downgrade sent it closer to junk status.
  • Draghi conveys positive message: The ECB left rates unchanged as expected. In the press conference, Mario Draghi managed to convey a message of satisfaction from the results of the huge LTRO operation. This  calmed the markets  temporarily  and released a short squeeze that sent the pair higher. It will be interesting to hear Draghi after Friday’s events.
  • US Holiday: Volume is expected to be lower than usual due to a US bank holiday –  Martin Luther King Day. This may postpone bigger moves by one day.
  • Successful Italian and Spanish bond auctions: Just before the presser, Spain and Italy raised money in the markets. For a change, Italy joined Spain and enjoyed a successful auction. The is likely part of the demand towards the next LTRO operation. Banks can pledge collateral in form of sovereign debt to the ECB and receive cheap loans. They enjoy a arbitrage.
  • Weaker figures in the US: After many months of improvement in jobless claims, the US saw a setback with a rise to 399K. Also retail sales disappointed and the positive Philly Fed Index was revised to the downside. The general picture is still positive though.
  • German auction reflects distrust in periphery: An early short term held earlier in the week resulted in negative yields. This means that investors are willing to take a loss just to hold German bunds –  anything but the periphery.
  • US asks Israel not to act in Iran: According to reports, the US is asking Israel not to act alone against Iran’s nuclear program. Tensions are already high around the Straights of Hormuz, as Europe moves slowly towards an oil embargo on Iran.
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