EUR/USD June 19 Weak German Data, Spanish Yields Unnerve

EUR/USD lost some ground after  its gains  following the victory of pro-bailout parties in Greece (June 18th).  While hurdles to forming a coalition will likely be overcome, the troubles in the euro-zone are far from over. The focus has quickly shifted to Spain, where bond yields remain at dangerous levels, and the announced bailout  might already be too small. It seems that without central bank intervention, more falls are on the cards. Tuesday go off to a bad start, as both the German and Euro-zone  ZEW  Economic Sentiment indicators posted sharp declines. In the US, today’s key release  is US Building Permits. As well, the G20  meeeting wraps up today in  Mexico.  

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

EUR/USD Technicals

• Asian session:  EUR/USD edged up to a high of 1.2589.The pair has  improved slightly in the European session, trading at 1.2607.
• Current range: 1.2587 to 1.2623.

• Further levels in both directions: Below: 1.2587, 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 pair has retraced, breaking through the 1.2587 line. 1.2623 is providing weak resistance.
• 1.2540 is providing support.

Euro/Dollar  slightly down as focus shifts to Spain  on high hopes for Greece – click on the graph to enlarge.

EUR/USD Fundamentals

• 9:00  German ZEW Economic Sentiment. Exp.  +3.8 points. Actual -16.9 points.
• 9:00  Euro-zone ZEW Economic Sentiment. Exp.  -5.7 points. Actual -20.1 points.
• 12:30 US Building Permits. Exp. 0.73M.
• 12:30 US Housing Starts. Exp. 0.72M.

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

EUR/USD Sentiment

• New Democracy party wins Greek elections: Markets across the globe breathed a huge sigh of relief after Sunday’s narrow victory by the center-right, pro-bailout New Democracy party.  However, it  is short of   majority, and will have to negotiate a coalition. Its potential coalition partner, center-left PASOK (which came out third) says it won’t join a coalition without the anti-bailout SYRIZA party, which came in second. This seems like a temporary negotiation tactic. However, Greeks did not overwhelmingly support austerity, and any coalition will have a hard time implementing further austerity measures, which could trigger yet another political crisis.
• Weak European Economic Sentiment Data: German ZEW Economic Sentiment plunged to a five-month low, posting a figure of -16.9 points. Given a spate of weak German data recently, this could be a sign of weakness in the once invincible German economy. To make matters even worse, the Euro-zone Economic Sentiment was awful as well. The indicator  fell well below the market forecast as it reached its lowest level since January, at -20.1. points.
• Spanish yields surge over 7%: This time, the move above the 7% mark for 10 year bond yields seems more decisive, with a yield of 7.27%.   New reports suggest that 150 billion euros will be discussed. The markets didn’t like the initial 100 billion announcement and quickly found at least 8 holes – including the eventual sum of money, the sources and impacts on other countries, including Greece. Spain is practically begging the ECB to help.   So far, the powerful ECB has refused to get involved and provide help. Rating agencies add to trouble by downgrading Spain and its banks, which are intertwined too closely.
• Italy is still struggling: The Euro-zone’s third largest economy is also suffering from dangerously high yields, above 6%. This could spell severe trouble  as Italy has a debt  larger than its GDP – and the latter is squeezing fast. Italy cannot hide behind Spain for too long. If the economy continues to deteriorate, Italy could be the next EZ member to  hop onto the bailout bandwagon.
• G-20 Summit Holds Low Expectations: World leaders are meeting in Los Cabos, Mexico. With the “right” result in Greece, the pressure will likely be lighter on Germany, and the urge to act will be lighter as well. Without a coordinate central bank intervention or any acts of leadership (which is definitely lacking), the bleeding in the markets can continue. The G20 leaders pledged to consider concrete steps towards   a more integrated banking system, including common banking supervision and firm guarantees to repay bank depositors.  Such measures would be aimed at increasing banking cooperation and stem the severe debt crisis which has created havoc in Europe.
• Little Likelihood of QE3:  All eyes  will soon  be watching what  the fed does, or does not do when it announces the  US rate decision on Wednesday. There have been quite a few worrying signs about the US economy, but there’s little the Fed can do. Bernanke already said that there are   diminishing returns for QE3. The Federal Reserve  captain can be expected to continue to sail very, very carefully through hazaradous waters.