EUR/USD Oct. 12 – Higher After Solid US and European

EUR/USD moved higher after the release of strong US employment numbers, as Unemployment Claims dropped to its lowest level in over two years. The euro was further bolstered by speculation that the Spanish bailout may be closer following the credit rating cut by S&P, which downgraded Spain’s rating to just one notch above junk status. There was some good economic news as well, as Euro-zone Industrial Production came in well above the forecast. Two key releases out of the US later today wrap up the trading week – PPI and the University of Michigan Consumer Sentiment. With all the difficult economic news streaming out of Europe, the EU deserves congratulations as the recipient of the 2012 Nobel Peace Prize for its critical role in uniting the European continent.

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

EUR/USD Technical

• Asian session: Euro/dollar was uneventful, trading in the 1.2930 range. The pair has moved higher up 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, 1.2587, 1.2520 and 1.2460.
• Above: 1.30, 1.3060, 1.3105, 1.32, 1.3290, 1.34, 1.3437, 1.3480 and 1.3540.
• EUR/USD is testing the 1.2960 resistance line. 1.30, an important line, is next.
• 1.2900 has strengthened on the downside.

Euro/dollar higher after US, European data– click on the graph to enlarge.

EUR/USD Fundamentals

• 9:00 Euro-zone Industrial Production. Exp. -0.4%. Actual +0.6%.
• 12:30 US PPI. Exp. +0.8%.
• 12:30 US Core PPI. Exp. +0.2%.
• 13:55 US Preliminary UoM Consumer Sentiment. Exp. 78.1 points.
• 13:55 US Preliminary UoM Inflation Expectations.
• 16:35 US FOMC Jeffrey Lacker Speaks.
• 18:00 US Federal Budget Balance. Exp. +59.0B.

EUR/USD Sentiment

• Euro improves after 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 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 as 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”.
• 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.
• IMF 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. This pessimistic forecast could further dampen confidence in the shaky euro.
• Greece’s economy nosedives as bailout discussions continue: 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. Greek GDP contracted 7.1% in 2011, and Finance Minister Yannis Stournaras estimated that by 2014 the economy will have shrunk by a staggering 25% since the recession started in 2008. Without economic growth, Greece will be unable to reduce its debts, no matter what austerity plan 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.
• Recession Deepens 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 weak areas, such as business sentiment and manufacturing.

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