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EUR/USD  leaped around 200 pips on the announcements made in the EU Summit. The decision to give an equal status to the bailout funds and avoid the scenario of the Greek subordination is definitely good news. The direct bank recapitalization decision is still full of holes, big ones. There are quite a few indicators on the agenda, but the EU Summit digestion and another topic rule markets: the month, quarter and half year draw to an end, and some last minute scrambling could make markets very wild today.

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

EUR/USD Technicals

  • Asian session: Euro/dollar leaped during the Asian session to the 1.2624 line before retreating under 1.26.
  • Current range: 1.2520 to 1.2587.

EUR/USD Chart June 29 2012

  • Further levels in both directions:
  • Below: 1.2520, 1.2440, 1.24, 1.2330, 1.2288, and 1.22.
  • Above: 1.2587, 1.2660, 1.2760, 1.2814 and 1.2873, 1.29 and 1.2960.
  • Yet again, the January 2012 low of 1.2624 proved to be strong in both directions.
  • 1.24 played well as support, before the summit.

Euro/Dollar  leaps on EU Summit decisions – click on the graph to enlarge.

EUR/USD Fundamentals

  • 6:00  German Retail Sales. Exp. +0.1%. Actual -0.3%.
  • 6:45  French Consumer Spending. Exp. 0%. Actual +0.4%.
  • 8:00 Euro-zone  M3 Money Supply. Exp. +2.4%. Actual +2.9%.
  • 9:00 Euro-zone  CPI Flash Estimate. Exp. 2.4%. Actual 2.4%.
  • 12:30 US  Personal Spending. Exp. +0.1%.
  • 12:30 US Personal Income. Exp. +0.3%.
  • 12:30 US  Core PCE Price Index. Exp. +0.2%.
  • 13:45 US Chicago PMI. Exp. 52.8 points.
  • 13:55 US Consumer Sentiment. Exp. 74.2 points.

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

EUR/USD Sentiment

  • EU Summit – One important decision: In a late night effort, EU leaders agreed that the ESM will NOT have seniority over private bondholders. This will help in calming investors. Other than that, they decided on allowing the ESM bailout fund to recapitalize banks, but the statement is quite  ambiguous. There are at least 5 holes in the EU Summit statement, so the rally could falter.
  • End of week, month, quarter, and half year: Many portfolio managers need to readjust positions at the end of a very volatile quarter, and this may trigger wild action, perhaps some correction in favor of the euro. In addition, European banks need to tidy up their books towards meeting new capital requirements. Towards the end of the day, after all the positions are readjusted, we could see a reversal.
  • German economy shows signs of weakness: The drop in retail sales joins earlier disappointments and shows that Germany is not immune. Last week saw disastrous German ZEW Economic Sentiment release and this week featured weak employment figures disappointed the markets. The number of unemployed people rose by seven thousand, exceeding the estimate of five thousand. The unemployment rate  came in at 6.8%, above the 6.7% forecast.
  • Spanish bailout doesn’t lower yields: Spanish yields aren’t at the peak of 7.28%, but the official request and the EU summit don’t have a sufficient effect on yields. The bailout is unlikely to be a panacea, given the  8 holes  in the aid package. Adding to Spain’s woes, the Moody’s ratings agency downgraded 28 Spanish banks earlier this week. The Spanish government is feeling the heat, and has just passed a  new law limiting cash transactions.
  • Greek government faces tough challenges: A fall in an annual scale of 9% is expected in Greece in Q3. This is a rough start for the new government, that finds itself between a rock and a hard place, trying to comply with its bailout obligations while easing the tremendous economic hardships which the Greek populace is facing. The  EU, particularly Germany, will have to show some flexibility on the bailout terms  and agree to some changes if it is serious about keeping Greece in the EZ.
  • US Housing – a bright spot: Those still hoping for QE3 after the Fed  decided not to introduce QE, but did announce that it would extend Operation Twist  will find the improving housing sector to be a problem for their theory.Pending home sales, new home sales and building permits are on a rise. Other figures are more mixed, such as  US  Durable Good  Orders jumped 1.1%, but Core Durable Goods Orders came in at  0.5%, well below the market forecast.
  • France fights to avoid EZ contagion:  French banks are heavily exposed to Greek and Italian debt, and are watching with dread the turmoil in Spain. The economy has serious structural problems – the debt is about 90 percent of GDP and rising. President Holland is strongly pushing a European bank union, and wants immediate recapitalisation of banks from  euro zone  rescue funds, which Germany is firmly against. We could see some sharper disagreements between these two powerful neighbors.
  • Dark Clouds Hovering over Italy:  Italian PM Mario Monti has asked for help from Germany and the ECB as the situation worsens. The Euro-zone’s third largest economy is also suffering from a problematic banking system. This may explode later on. The economy isn’t doing much better, as GDP 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