EUR/USD Jan. 26 – Extends Impressive Rally on PSI Deal

Euro dollar  is rallying in an impressive manner, breaking another important resistance line. The rally that began with Bernanke’s extension of the zero-rate policy continues with new hope of getting a deal done around the Greek haircut. In addition, more signs of strength from Germany and a successful Italian bond auction also help the single  currency. Another significant bulk of US data awaits the markets. How far will the euro go?

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

EUR/USD Technicals

• Asian session: Quiet session saw consolidation on high ground – 1.3060 to 1.3145. Breakout came in European session.
• Current range:  1.3145 to 1.3212

• Further levels in both directions: Below   1.3145, 1.3060, 1.30, 1.2945, 1.2873, 1.2760, 1.2660 and 1.2623
• Above:   1.3212, 1.3280, 1.3333, 1.3450 and 1.3550.
• Note the uptrend channel on the hourly chart. The pair is  seeking  to break above these levels.
• 1.3145 is a tough line. If the breakout is confirmed, it will switch to strong support.
• 1.3212 is strong on the upside.

Euro/Dollar in range before Bernanke- click on the graph to enlarge.

EUR/USD Fundamentals

• 7:00 German GfK Consumer Climate. Exp. 5.6. Actual 5.9 points.
• 10:15 Italian auction yields better yields and full cover.
• 13:30 US  Unemployment Claims. Exp. 371K (after the excellent surprise last week).
• 13:30 US  Durable Goods Orders. Exp. +2.1%. Core exp. +0.9%.
• 15:00 US  New Home Sales. Exp. 321K.

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

EUR/USD Sentiment

• Fed Extends Zero Rate Policy:  The FOMC Statement contained one significant change: the low rates are now likely to remain until late 2014, instead of mid 2013 stated earlier. Together with a hint by Bernanke that QE3 is still open, the dollar fell. On the other hand, the Fed announced an explicit inflation target: 2%. This may sound tight and it initially helped the dollar, but Bernanke then clarified the flexibility of this target. All in all, this rate decision boosted stocks, commodities and all currencies except the US dollar.
• Greek haircut deal closer: A new report says that the banks (through the IIF) now agree to a lower interest rate. This comes after the EU finance ministers rejected a previous “final” offer by the banks. This helps the euro. The drama over PSI is going on for a quite a while. It’s important to note that German Chancellor Angela Merkel has doubts if Greece can avoid a default.
• ECB Pressured to take a haircut?: There is growing pressure that the ECB will join private bondholders and accept a haircut on its Greek bonds. The pressure comes from the banks (naturally) and also from the IMF. Note that ECB president  Draghi didn’t categorically reject this. EU finance ministers say that Greece is off track and must make reforms and secure PSI as soon as possible. This joins reports say that the EU and the IMF  request  a new report on debt sustainability, while a report on Germany’s Bild Zeitung  says  that these international creditors are “shaken” by the state of administration in the Hellenic  Republic.
• German strength: The GfK report joined ZEW and the highly important IFO results in showing that Germany’s economy is strong and confident. Will it be enough to pull the whole zone forward?
• Italy joins Spain in bond relief: Italy was lagging behind Spain in bond auction and yields. Spain raised more money than expected while Italy continued paying high prices. Italy is now catching up, with an impressive improvement, especially on the short end of the curve. The LTRO of the ECB certainly plays a big role.
• Portugal deteriorates: The biggest victim of the  multiple S&P downgrades  is Portugal, which saw its yields leap. The chances of a default there are rising. The bond auction today will be closely watched. The downgrade of the bailout fund (EFSF) hasn’t hurt its bond auction. Also France, which got the historic downgrade, survived it quite well.