EUR/USD: 1.3135
The Euro was kept under pressure, early in the European session, as Spanish bond yields traded the wrong side of 6% and the spread over German Bunds blew out to 443 bps. Having broken 1.3000 though (low 1.2993), the downward momentum waned and despite the concerns that Spanish bonds may begin to head towards 7%, the Euro stabilised and then staged an impressive rally that gained momentum as the day wore on. One of the reasons being touted for the sharp recovery is the prospect of another liquidity squeeze, which has seen banks selling foreign assets and repatriating the funds back into Euros. Heavy short covering following the better than expected US retail sales, improving risk sentiment somewhat, have not hurt the Euro either.
Equity markets had a better day as well, with the DAX and the CAC both roughly 0.5% higher although the S+P has closed down 0.5%.
Technically the short term momentum remains higher towards the 76.4% Fibo level at 1.3165 (1/3210/1.2993). This is only 20 points away though and so we could be in for a choppy couple of sessions ahead. The 4 hour charts are backing this up with the MACDs beginning to flatten out somewhat so it pays to be pretty flexible here and to keep stops tight. It is difficult to get overly bullish on the Euro, given the situation in Europe, but given the overwhelmingly bearish sentiment, the market is trading from a very one-sided bias and further a further short squeeze could lie ahead. Should we go above 1.3165, further stops could well see a move back towards 1.3210, (12 April high). This looked unlikely yesterday, but the momentum indicators have turned around and so patience is required. Above 1.3210 would potentially see 1.3235 (61.8% of 1.3385/1.2993).
The downside sees a return to short term support levels at 1.3090, 1.3050 and at 1.3000. This doesn't look to be seen too likely today but could easily come under pressure again on the first sign of further deterioration in the EU.
Right now, keep very nimble. In the short term further upside looks possible, but the Euro remains very vulnerable. There is a short term Spanish Bill auction later today and a 2 & 10 year bond auction later in the week which is sure to keep the market nervous.
EU/German CPI, ZEW survey and Draghi speech today. Later on US Housing Starts/Building Permits, Industrial Production and Capacity Utilization.
