EUR/USD Sep. 27 Markets Nervous Ahead of Spanish Austerity

EUR/USD  remains under pressure as the problems in Spain continue to mount.  The markets are nervously eyeing today’s Spanish budget, which promises to contain more cuts and austerity measures. As Catalonia prepares for elections and seeks independence from Spain, the Spanish capital Madrid was rocked by anti-austerity protests.   The Spanish bank bailout is now in doubt after finance ministers from strong countries seemed to have pushed it to a distant date in the future. Protests have also been seen in Greece, that went on a general strike. All in all, trouble loves the euro. The markets will be very busy digesting a host of Euro-zone and US data today. The markets were pleased with the Italian 10-year Bond Auction, which  saw yields drop to 5.24%. Today’s other highlights include three key releases in the US – Core Durable Goods Orders, Unemployment Claims and Pending Home Sales.

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

EUR/USD Technical

• Asian session: Euro/dollar  edged down to around 1.2850.  The pair is unchanged in the European session.
• Current range: 1.2814 to 1.2920.

Further levels in both directions:    

• Below: 1.2814, 1.2750, 1.2670, 1.2624, 1.2587, 1.2520 and 1.2460.
• Above: 1.2920, 1.2960, 1.30, 1.3060, 1.3105, 1.32, 1.3290, 1.34, 1.3437, 1.3480 and 1.3540.
• 1.2920 has strengthened in resistance as the pair trades lower.
• 1.2814 is the next support level.

Euro/Dollar  under pressure ahead of Spanish budget  – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00 German Import Prices. Exp. +0.9%. Actual +1.3%.
• 7:55  German Unemployment Change. Exp. 10K. Actual 9K.
• 8:00 Euro-zone M3 Money Supply. Exp. 3.3%. Actual +2.9%.  
• 8:00 Euro-zone Private Loans. Exp. +0.1%. Actual -0.6%.
• 8:10 Euro-zone Retail PMI. Exp. 47.1 points.
• 9:24 Italian 10-year Bond Auction. Actual. 5.24%.
• 12:30 US Core Durable Goods Orders. Exp. +0.2%.
• 12:30 US  Unemployment Claims.  Exp. 378K.
• 12:30 US Durable Goods Orders. Exp. -4.7%.
• 12:30 US Final GDP.Exp. +1.7%.
• 12:30 US Final GDP Price Index. xp. +1.6%.
• 12:30 Pending Home Sales. Exp. -0.4%.
• 14:30 US Natural Gas Storage. Exp. 75B.

EUR/USD Sentiment

• Adios to Spanish bank bailout?: Finance ministers from Germany, the Netherlands and Finland declared that bank supervision and bank bailout would only come for new banking problems and not for legacy ones. Thus, the agreements in the June 2012 EU Summit regarding a banking bailout for Spain seem null and void. Breaking the link between sovereigns and banks was a key value less than 3 months ago, and now it is gone. This means that if Spain still wants to save its banks, it will need to pour more of its money into them, at the same time as it cuts in other areas and raises the VAT. This news pushed Spanish yields higher, together with the projected future debt. PM Mariano Rajoy  continues to keep the markets guessing about the bailout, and the uncertainty continues to weigh on the euro.
• Protests rage in Madrid and Athens: Madrid was rocked by violence after an anti-austerity rally turned violent. This adds pressure on the Rajoy government, after Catalonia declared early elections on November 25th. These elections will serve as a de-facto referendum for independence after a huge and peaceful rally took place in Barcelona on September 11th. In Athens, a planned general strike turned violent and added pressure on the politicians not to  accept all of the troika demands.
• Spanish woes spooking markets: Spain continues to be beset by severe economic troubles, which is only exacerbating market uncertainty. A bailout package for Spain is not a given, just yet, after the Spanish economy minister said the country would not rush to seek aid from the ECB.   Meanwhile, the yields on Spanish 10-year bonds jumped over the dangerous 6% level this week. On Thursday is government is expected to announce a draft budget for 2013  and far-reaching economic reforms. The results of the stress tests on banks will be announced on Friday.   As well, Moody’s is expected to complete their ratings review on Spain later this week.
• Greece talks with troika stumbling?: With the troika showing some flexibility over Greek repayments, there is hope for a quick conclusion of new measures, which will later require the approval of coalition partners.   Talks about a third bailout program became more loud in recent days, as Greece is nowhere close to meeting targets. There are news reports out of Greece that  the sides are further apart than they are saying publicly, and that the IMF is unhappy providing more funds to Greece at this point in time.
• European recession looming: France saw a big plunge in its purchasing managers’ indices, and the Euro-zone releases remain unimpressive. All in all, the euro-zone is contracting at a very fast pace, and this is worrying. Germany, once the all-powerful locomotive in Europe, is also producing worrying numbers, as its economy looks more and more vulnerable to the malady gripping much of Europe. No less important, consumer and business confidence is weak. The markets received a rude reminder of that this week, as German Business Climate and Consumer Climate releases fell below market estimates. However, there was some good news on Thursday, as unemployment and inflation figures beat the estimates.
• Dollar rebounds after QE3: After weeks of speculation, the Fed finally gave the nod to QE3 earlier this month. It launched an open ended program worth $40 billion dollars of monthly buys of MBS in order to help the housing sector, but also to encourage lending. This comes in addition to extending the low rates guidance to 2015 and continuing the existing Twist program worth $45 billion a month. The dollar did take a beating right after the QE announcement, but is has since rebounded. There is growing notion that a) the move was priced in, and b) the worsening global outlook will aid the greenback. Federal Philadelphia President Charles Plosser surprised the markets  with a bleak assessment about QE3. Plosser, known as an inflation  hawk,  bluntly stated  that the move is unlikely to  boost growth or hiring, and  may jeopardize the  Fed’s credibility.
• US economy – up, down, or both?: The housing sector has gained steam recently, even if the fresh new home sales don’t look good at the moment.   Existing Home Sales looked sharp, posting a figure of 4.82 million. However, jobless claims remain at stubbornly high levels, and the improvement in the Philly Fed Index still left it in the red. As the November elections fast approach, both Democrats and Republicans will be highlighting whichever economic releases help their campaign. Given the mixed batch of releases, both camps should have plenty of data to choose from.