EUR/USD Oct. 11 – Steady as Spain Takes Hit From S&P

EUR/USD remains steady,  despite the news that the S&P  Rating Agency  downgraded Spain’s credit rating to one notch above junk status.  This bad news comes on the heels of    a  report from the IMF, which warned that the Euro-zone is at risk of breaking up if drastic action is not taken  to relieve the debt crisis. The euro is also under pressure over market uncertainty as to whether Spain will request a bailout and as tough negotiations continue between Greece and its international creditors. The   ECB publishes its monthly bulletin later today, and the markets will be watching two key US releases – Trade Balance and Unemployment Claims.

Here’s an update about technical lines, fundamental indicators and sentiment regarding EUR/USD.

EUR/USD Technical

• Asian session: Euro/dollar was trading in the 1.2860 range. The pair has edged up in the European session.
• Current range: 1.2900 to 1.2960.

Further levels in both directions:    

• Below: 1.29, 1.2814, 1.2750, 1.2670, 1.2624, 1.2587, 1.2520 and 1.2460.
• Above: 1.2960, 1.30, 1.3060, 1.3105, 1.32, 1.3290, 1.34, 1.3437, 1.3480 and 1.3540.
• EUR/USD has pushed above 1.29, which  is providing weak support.
• 1.2960 is the next line of resistance.

Euro/dollar  steady after S&P downgrades Spain- click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00 German Final CPI. Exp. 0.0%. Actual 0.0%.
• 6:45 French CPI. Exp. 0.1%. Actual -0.3%.
• 7:30 US FOMC Member Janet Yellen Speaks.
• 8:00 ECB Monthly Bulletin.
• 12:30 US Trade Balance. Exp. -44.1B.
• 12:30 US Unemployment Claims. Exp. 368K.
• 12:30 US Import Prices. Exp. +0.7%.
• 14:00 US FOMC Member Jeremy Stein Speaks.
• 14:30 US Natural Gas Storage. Exp. 79B.
• 15:00 US Crude Oil Inventories. Exp. 1.3M.
• 17:00 US 30-year Bond Auction.

EUR/USD Sentiment

• S&P downgrades Spain’s Credit Rating: Spain’s economy got a thumb’s down from S&P, as the ratings agency  cut its rating on Spain to BBB-minus from BBB-plus with a negative outlook. S&P  warned of “mounting risks to  Spain’s public finances” and warned that  Spanish political institutions are having difficulty coping with the country’s fiscal and economic crisis.  S&P also noted  that high  unemployment and  budget difficulties  will likely increase tensions  between Spain’s central and regional governments.
  The rating cut by S&P  follows that of Moody’s which downgraded Spain in June.
• Gloomy IMF report about health of Euro-zone: The IMF released  its Global Finance Stability Report which rattled market sentiment. The report reduced its forecast for global growth from 3.5% to 3.3%, and expressed pessimism about the situation in Europe. Without drastic action to combat the debt crisis, the report stated, the capital flight out of Europe will worsen, and deteriorating economic conditions could lead to the breakup of the Euro-zone. This pessimistic forecast  could further dampen confidence in the shaky euro.
• No Spanish request for aid (yet): “When we rescue Spain and Greece, we are thinking about our banks“ said Jürgen Donges, one of the 5 members in Germany’s economic council. Hearing a senior German official say this clearly caused anger in Spain. If his words continue to echo, it might delay the bailout request. And where does the bailout request stand? Spain’s deputy PM said the bailout is a question of “when” and not “if”, but other senior figures said that this decision depends on conditions, and that it might not be made. ECB president Mario Draghi made it clear that the central bank’s OMT program is ready for use for Spain, but Spain needs to ask for aid. If Spain needs the bailout, why the delay? There are a host of reasons, including lower Spanish yields and internal regional elections.
• Greek economy in free-fall: Meeting in Luxembourg earlier this week,  European finance ministers were full of praise over Greece’s determination to trim its budget and improve its fiscal situation, raising the likelihood that the ECB will approve the next bundle of bailout funds. There was some talk that the ECB could accept a delay in payments or lower interest rates, but there is strong opposition in the German government to such a move. So, the next “deadline” is the EU Summit on October 18-19th. However, simply tinkering with Greece’s repayments is  no more than a band-aid solution. The Greek economy continues to free-fall, and has shrunk by an astounding 20% in the past four years. Without economic growth, Greece will be unable to reduce its debts, no matter what austerity measures it implements.
• Merkel pays visit to Athens:  Angela Merkel  is widely seen  by Greeks as the main force driving the harsh austerity measures they are being forced to endure. Fortunately, her  brief  visit to  Athens, held under extremely tight security, went off without a hitch. The German Chancellor made sure to sound conciliatory on her visit to Athens, complimenting the Greek government’s actions and declaring that she was confident that the country’s austerity measures would pay off.
• Regional tensions increase in Spain: As if bailout concerns, unpopular austerity measures  and credit rating  downgrades weren’t enough bad  on  the plate of  the beleaguered Spanish government, regional tensions are worsening. Separatist sentiment in Catalonia is rapidly gaining steam, and a recent rally for independence brought some 2.5 million  people out to the streets. Catalonian President Artur Mas was rebuffed by Madrid when he asked for a better fiscal pact for Catalonia and he responded by calling regional elections in November. We could see a referendum on independence in the near future, and the hot issue of regional secession is unlikely to cool down anytime soon.
• US economic releases gain attention in tight election campaign:With polls showing a tight election race in the US, every economic release becomes critical and part of the campaign strategy of both sides. The US added 114K jobs in September, and revisions added an additional 86K. In addition, the unemployment rate surprised analysts by dropping to 7.8%.   However, these positive figures were marred by a rapid gain in temporary jobs rather than permanent ones, and they stirred a political debate as elections are less than a month away. Today’s unemployment claims are expected to remain unchanged.