EUR/USD Oct. 16 – Breaks 1.30 After Strong German, US

EUR/USD pushed over the 1.30 line, after better than expected data of the US and Germany. German Consumer Sentiment hit a five-month high, and in the US, Retail Sales and Core Retail Sales climbed 1.1%, well above the estimate. A story in the Wall Street Journal that Spain will ask for aid sooner rather than later has the markets buzzing, as the Spanish bailout saga continues. The US will release Core CPI later today.

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

EUR/USD Technical

• Asian session: Euro/dollar climbed higher, crossing 1.30 and touching 1.3012. The pair is steady in the European session.
• Current range: 1.30 to 1.3060.

Further levels in both directions:  

• Below: 1.30, 1.2960, 1.29, 1.2814, 1.2750, 1.2670, 1.2624 and 1.2587.
• Above: 1.3060, 1.3105, 1.3170, 1.3290, 1.34, 1.3437 and 1.3480.
• 1.30, a pivotal line, is providing weak support.
• 1.3060 is a strong line on the upside.

Euro/dollar higher after positive US data, rumor over Spanish bailout– click on the graph to enlarge.

EUR/USD Fundamentals

• 00:30 US FOMC Member John Williams Speaks.
• 8:00 Italian Trade Balance. Exp. +2.57B. Actual -0.60B.
• 9:00 German ZEW Economic Sentiment. Exp. -14.6 points. Actual -11.5 points.
• 9:00 Euro-zone CPI. Exp. +2.7%. Actual +2.6%.
• 9:00 Euro-zone Core CPI. Exp. +1.6%. Actual +1.5%.
• 9:00 Euro-zone ZEW Economic Sentiment. Exp. -1.1 points. Actual -1.4 points.
• 9:00 Euro-zone Trade Balance. Exp. +8.4B. Actual +9.9B.
• 12:30 US Core CPI. Exp. +0.2%.
• 12:30 US CPI. Exp. +0.4%.
• 13:00 US TIC Long-Term Purchases. Exp. 45.3B.
• 13:15 US Capacity Utilization Rate. Exp. 78.4%.
• 13:15 US Industrial Production. Exp. +0.2%.
• 14:00 US NAHB Housing Market Index. Exp. 41 points.

EUR/USD Sentiment

• Euro Higher After Rumor on Spanish Bailout: The markets were abuzz this morning after the well-respected Wall Street Journal reported that the Spanish government was very close to asking for an aid package. This contradicts the official line out of Madrid that no request will be made before November. Spanish PM Mariano Rajoy is  betting that the longer he waits, the better his bargaing position. Meanwhile, there is plenty of opposition in Germany and elsewhere to a bailout for Spain. Italian Finance Minister Vittorio Grilli noted that a 100 billion euro aid request from Spain would shave 1.5 percent off Italy’s economic output. Although Grilli was quick to add that Italy had to be “generous”, clearly he is no supporter of the bailout. The high-stakes posturing between Spain and the EU makes for a most interesting background, just a few days before the EU Economic Summit.
• Greece deal imminent? Greek PM Antonis Samaras expressed confidence that the Greek government and its international lenders would reach a deal on the country’s mountain of debt before a meeting of EU leaders on October 18. Greece has been holding talks with the European Union, European Central Bank and International Monetary Fund on a new set of spending cuts and economic reforms in exchange for the next installment of bailout funds, worth 31,5 billion euros. The talks have dragged on for months, and Greece claims it will run out of funds in November if it doesn’t receive the funds. If a deal is signed, it would bring some much-needed stability to the markets, and could give the euro a lift.
• Positive Chinese data bolsters euro: The markets got some good news from China, as the country’s trade surplus widened in September, and exports jumped 10% compared to the same period last year. Strong Chinese readings could mean an improving global economy, which is bullish for currencies such as the euro, as investors are willing to take on more risk and move away from the safe-haven dollar. On the downside, the dispute between China and Japan over some contested islands continues, and trade is down between the two Asian giants. For example, Japanese auto sales to China have dropped between 35-50% in recent months.
• Spain takes hit from S&P: Spain’s economy got a thumb’s down from S&P last week, as the well-respected ratings agency cut its rating on Spain by two notches, to BBB-minus from BBB-plus with a negative outlook. S&P warned of “mounting risks to Spain’s public finances” and noted that Spanish political institutions are having difficulty coping with the country’s fiscal and economic crisis. The downgrade announcement also stated that high unemployment and budget difficulties will likely increase tensions between Spain’s central and regional governments. The euro actually improved on the news of the S&P cut, as the markets are more optimistic that the uncertainty over the Spanish bailout will finally end and Madrid will have to throw in the towel and request an aid package. But here’s the catch – Moody’s, a rival of S&P, has stated that if Spain requests a bailout, it might cut the country’s credit rating. In the succinct words of one market analyst, “Spain is a bit between a rock and a hard place”.
• 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.
• Recession Worsens in Euro-zone: Spain and Greece are in the daily headlines these days, but other zone countries have serious problems as well. In France, GDP has dropped for three straight quarters, PMIs are down, and the Hollande government has introduced unpopular austerity measures. Italy is also struggling, with a contracting economy, rising bond yields, and weak retail sales and industrial production numbers. Germany is in better shape, but the once invincible locomotive of Europe has slowed down and has some glaring weaknesses, such as business sentiment and manufacturing.

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