Search ForexCrunch

EUR/USD  opened the week with an impressive weekend gap, after the announcement of a bank bailout for Spain worth 100 billion euros. This declaration lacks details and the timing shows that it is a move intended to contain the fallout from the Greek elections. Italian issues are still on the agenda. After the initial jump, the pair is now below the critical line that separated ranges in recent weeks. Will markets see this as a significant change in handling the crisis, or is it just another short opportunity?

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

EUR/USD Technicals

  • Asian session: The pair started with a huge weekend gap of around 150 pips and eventually drifted lower.
  • Current range: 1.2587 to 1.2624.

EUR/USD Chart June 11 2012

  • Further levels in both directions: Below:  1.2540, 1.2460, 1.24, 1.2330, 1.22, 1.2144, 1.20, 1.1876 and 1.17.
  • Above: 1.2623, 1.2660, 1.2760, 1.2814 and 1.2873.
  • The failure of the pair to hold above the all important line of 1.2624 is a worrying sign for euro bulls..
  • 1.2587 is holding for now, but 1.2540 is much stronger.

Euro/Dollar  lower as Spain nears a bailout – click on the graph to enlarge.

EUR/USD Fundamentals

  • 6:45  French Industrial Production. Exp. +0.1%. Actual +1.5%.
  • 14:00 US FOMC member  Dennis Lockhart speaks.

For more events and lines, see the  Euro to dollar forecast

EUR/USD Sentiment

  • Spanish Bailout Announced: In an emergency sesssion over the weekend, the Eurogroup announced a commitment to support Spanish banks by up to 100 billion euros, depending on results of a still-to-be-published audit. The hasty decision is clearly made to contain a potential fallout from the Greek elections. There are 8 holes in the Spanish bailout, including the eventual sum of money, the sources and impacts on other countries, including Greece. Market  euphoria  is slowly drifting away, yet the Sunday gap is still open.
  • Italy next?: Spain is the euro-zone’s fourth largest country and the fourth country to get a bailout. Italy is the euro-area’s third largest and its debt to GDP ratio is much higher. While Italian yields are enjoying the Spanish news, Italy cannot hide behind Spain for too long.
  • Hopes for QE3 Diminished: Bernanke disappointed with no hints about QE3. As always, he left the door open for any policy, and also mentioned a low risk of deflation. Nevertheless, his talk about a stabilizing housing market and  diminishing returns for QE3, lower the chances for action on June 20th, unless European troubles hit US shores in a horrible manner, but this is still to be seen.
  • Draghi offers nothing:  The markets were hopeful that the ECB would show some leadership in a crisis situation, and  perhaps lower interest rates by 0.25%.    The central bank chose not to  make a move, and maintained rates at 1.0%.    ECB head Draghi  stated yet again that it was up to the EZ  leaders to take the tough decisions needed to stabilize the zone and the euro.  Draghi had little to offer in way of support, and made no mention of any new easing measures to help the markets.
  • US recovery in trouble?: Recent US employment data was very weak, and other economic releases have not been impressive. This casts yet another shadow on global growth. There is not much likelihood of action by the Fed, since inflation isn’t low enough and the effect of bond buying with historically low US yields is meaningless. The  Fed may have exhausted its options, although things could change in a hurry if the US economic recovery sputters.
  • Greece’s Second Bailout Failed: It doesn’t matter who wins in Greece’s second round of elections on June 17th, the country is falling apart day after day. A  third bailout for Greece  could leave it in the euro-zone, but an exit seems more and more certain. Greek pharmacies are unable to supply subsidized drugs, money is taken out of the banks and the bigger problem is with tax payments: many Greeks are deferring tax payments and this weighs heavily on the state coffers, which are running dry.  See how to trade the Grexit with EUR/USD.