EUR/USD Oct. 15 – Higher as Greek Talks Progress, Strong

EUR/USD posted gains, as it started the trading week on a positive note. Greek Prime Minister Antonis Samaras stated that he expected his government would reach an agreement with the troika before Thursday’s European Union summit. There was also good news out of China, as its trade surplus widened last month. There are no scheduled European releases today, while the US will publish to key releases – Core Retail Sales and Retail Sales.

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

EUR/USD Technical

• Asian session: Euro/dollar dropped as it  tested 1.29. The pair has rebounded in the European session.
• Current range: 1.2960 to 1.30.

Further levels in both directions:  

• Below: 1.2960, 1.29, 1.2814, 1.2750, 1.2670, 1.2624 and 1.2587.
• Above: 1.30, 1.3060, 1.3105, 1.3170, 1.3290, 1.34, 1.3437 and 1.3480.
• 1.30, a pivotal line, is next on the upside.
• 1.2960 is back in a support role as the pair moves higher.

Euro/dollar higher after Greek talks progress, positive Chinese numbers– click on the graph to enlarge.

EUR/USD Fundamentals

• 12:00 US FOMC Member William Dudley Speaks.
• 12:30 US Core Retail Sales. Exp. +0.6%.
• 12:30 US Retail Sales. Exp. +0.7%.
• 12:30 US Empire State Manufacturing Index. Exp. -4.5 points.
• 14:00 US Business Inventories. Exp. +0.5%.
• 16:45 US FOMC Member Jeffrey Lacker Speaks.

EUR/USD Sentiment

• 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 shaky euro a lift.
• Spanish bailout saga continues: The weekend came and went without incident, as the bailout watch over Spain continues. With regional elections in Spain scheduled for Oct. 21, the markets are not expecting a formal request from Madrid this week. A rumor floated that Spanish official was quoted as stating that the EU will not object to an aid request by Spain. However, this was contradicted by Angel Gurria, Secretary General of the OECD, who said that the EU might not run to Spain’s aid if a bailout request was made. As well, the German Finance Minister Schauble has been hinting that Spain hold off for now. Meanwhile, the pressure on Spanish PM Rajoy over the bailout increases from day to day. If Spain is in such dire need of a rescue package, why the delay? There are a host of reasons, including lower Spanish yields and internal regional elections.
• Solid 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.
• S&P downgrades Spain’s Credit Rating: 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”.
• IMF report pessimistic over Euro-zone: Earlier this week, 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. The markets are hoping that the EU leaders are paying attention and that some concrete action will be taken at the EU Economic Summit later this week.
• 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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