EUR/USD: 1.2700
The Euro finished Friday on a relatively quiet but firm note as the market nervously marked time with some position squaring ahead of the Greek election over the weekend. This morning, it looks as though the New Democracy party has enough votes in the election to form a Government, which will be the best outcome for the markets, although it won't solve any immediate problems with regards to the Greek economy. It will ease tensions though at the G20 in Mexico, today/tomorrow, where the EU crisis will top the agenda.
Elsewhere on Friday, we had Angela Merkel upping the ante over EU tensions, with an attack on French President Hollander’s policies and once again squashing the idea of Germany propping up the Club Med EU members, through the issuance of Eurobonds. Over weekend in French elections, President Hollande has won control over both the lower and upper house which will allow him to enact his growth oriented policies with greater ease.
Other points of note are that Cyprus is expected to put its hand up for a bailout in coming weeks. It has a large exposure to the Greek bond market and Monday’s election result will be all important.
Across in Ireland, the IMF have urged the EU to provide assistance to help refinance the Irish banks in order that Ireland can once again access the bond markets and avoid the need for another bailout package in the future.
Bond yields in Spain and Italy eased back a little on Friday but still remain at elevated levels (Spain 10 years, 6.9%) and equity markets generally had a positive session, generally closing up 1.0% /1.5%.
The ECBs Mario Draghi reiterated that the ECB stand ready to provide additional liquidity to solvent EU banks, while adding pressure to the politicians by telling them that they need to act quickly to avoid serious further downside systemic risks. An ECB rate cut to breath some life into the EU economy is beginning to look an increasingly likely prospect.
On the other side of the Atlantic, US Consumer Confidence fell to a 6 month low and soft manufacturing data ensured that the US$ remained under pressure and continues to raise the possibility of further monetary stimulus from the Fed. This assisted the S+P to finish +1% and we won't have to wait too long to find out, with the FOMC coming up on Wednesday.
Technically, the Euro has some positive momentum, having spent the entire week attempting to regain the losses seen last Monday. The Fibo level of 1.2667 (and last Monday's high) remains the first upside hurdle to overcome and beyond here sees a possible return to 1.2784 (50% of 1.3282/1.2286). Minor resistance along the way is to be found at 1.2690 and 1.2740.
1.2670 is also important as it currently lies right at the previous support-turned-resistance level of the long term trendline (white line) connecting 0.8347 (July 2001) with 1.1875 (6 June 2010). If we fail here early this week, it is possible that we do head quite sharply lower. Although the daily charts are not suggesting that this is the preferred route. – yet.
On the downside, support is currently at 1.2590 (minor) and then at 1.2515 (trendline), which, according to the charts, doesn't look likely to be seen in the short term, but the election result could quickly change that.
The 4 hour indicators are a little overbought but there is still room to allow for near term upside price action on Monday. The dailies confirm this, but it can be news events such as those that we are expecting, that see the charts get thrown out of the window, so be very flexible on Monday.
Overall, I suspect any Euro strength - if seen - will be relatively short term in nature before normal service is resumed, although in the meantime, markets will be pretty positive on the election result. In the longer term I suspect that the result will resolve very little apart from prolonging the agony and although Greece is the current point of focus, Spain and Italy in particular are going to be a much bigger issue in the months to come.
The markets have opened higher this morning following the election result, with the Euro currently trading at 1.2700. The high so far has been 1.2738 and the opening means that there is a Monday morning gap now to be filled on the downside to Fridays close around 1.2640. Below here, 1.2600 should now see strong support.
Data to watch out for this week includes: Mon: G20
Tue: G20, German ZEW Survey, US Housing Starts
Wed: German PPI, FOMC
Thur; EU Fin Min Meeting, EU Mfg/Services PMI, Current Acc, Consumer Confidence US Mfg PMI, Existing Home Sales, Philly Fed Mfg Survey
Fri: EU Leaders summit, German IFO, China Leading Indicators Index,
