EUR/USD continues falling and is now below low support, following the rising uncertainty about the Spanish banking system. The euro-area’s fourth largest economy could be a favorite to win another European trophy in football, but its economy is an a race to the bottom. Spain is waiting for an external report on the banks and is unwillingly making a U-turn regarding external aid. This move continues Bernanke’s refusal to hint on QE. He even said that there are “diminishing returns” on this. Will the pair erase all this week’s gains?
Here’s an update on technicals, fundamentals and what’s going on in the markets.
- Asian session: The deterioration continued after the pair lost the 1.2540 line.
- Current range: 1.2460 to 1.2540. Break under 1.2460 not confirmed yet.
- Further levels in both directions: Below: 1.2460, 1.24, 1.2330, 1.22, 1.2144, 1.20, 1.1876 and 1.17.
- Above: 1.2540, 1.2587, 1.2623, 1.2660, 1.2760 and 1.2814.
- 1.2623 proved to be strong resistance once again, and a clear separator of ranges.
- 1.2460 is now support, but not so strong.
Euro/Dollar lower as Spain nears a bailout – click on the graph to enlarge.
- 6:00 German Trade Balance. Exp. 13.3 billion. Actual 16.1 billion.
- 6:45 French Trade Balance. Exp. -5.7, actual -5.8 billion.
- 12:30 US Trade Balance. Exp. -49.4 billion. Actual -50.2 billion.
- 14:00 US Wholesale Inventories. Exp. +0.5%.
For more events and lines, see the Euro to dollar forecast
- Imminent Bailout: Multiple reports speak about an official Spanish aid request coming this weekend. Spain refused getting help until very recently. It is unclear if Spain will get help from the ESM or EFSF bailout funds, the IMF or another mechanism. See the 4 Spanish bailout options. Spain might wait until Monday for an IMF report on the banking system. It also commissioned external consultancy firms, which are expected to report on this only on June 21. A bailout only for banks is problematic in the current frameworks. However, when there’s a will, there’s a way. The discussion is about a minimal bailout program of around 50 billion euros, which doesn’t include new humiliating austerity. Some estimates say this will end up in 350 billion euros.
- Pain in Spain: Spanish 10 year bond yields remain too high, above the 6% mark. Spain’s Treasury Minister Montoro has declared that financial markets are effectively closed to Spain because of the current high level of the country’s borrowing costs. There is no longer any doubt that Spain needs European assistance to recapitalise their broken banks. Exactly how to go about this promises to be a sticky problem. At yesterday’s 10 year Spanish government debt auction, Spain raised over EUR 2 billion, but the yield was very high, above 6%. A bailout for troubled Spain may not be far away.
- 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.