Euro : 1.2656
The reaction to the EU deal to ease borrowing conditions for Spain has been overwhelmingly positive, with all markets rallying strongly against the US$ and to a lesser extent against the Yen. Whether the momentum can be maintained is another matter, but for the time being the Euro looks as though it has further upside potential ahead. Although the short term measures to assist the banks seems to have been overcome, the long term issues still remain firmly in place and whether the politicians have the appetite to tackle them head on remains to be seen.
The deal allows the EU’s bailout fund to support struggling banks directly, and provides instant relief to the Spanish banking system, while, in addition to this, an EU supervisory body for banks will be created by the end of the year. Angela Merkel though, is in deep trouble at home, having stepped back from her hard line stance, once Italy and Spain refused to sign a €120bn “growth pact”, until Germany backed short-term measures to aid those nation’s indebted banks. The German parliament though still retains a veto over the deployment of any rescue funds, despite having agreed in principal to central eurozone finance to recapitalize indebted banks, and so the whole deal could yet turn to dust.
The markets though liked what they saw on Friday, enabling the largest one day rally of the year, and caught an awful lot of traders out in the process, as S/L buying propelled the move higher. Spanish (6.34%) and Italian (5.81%) bond yields fell sharply and for now the Euro looks to be pretty well underpinned. The markets look as though they are now hopeful of an ECB rate cut on Thursday to provide further assistance for the slowing EU economy, where even Germany’s data has recently been on the soft side, and which may further underpin the Euro.
Technically, the high of 1.2692 will be Asia’s first target this week and given the overbought nature of the hourly charts I would be surprised to see the Euro trade much above this early on Monday. The 4 hourlies though, have room for progress and are pointing sharply north, with the next barrier being the white trendline (chart) resistance at 1.2715. Beyond there, sees 1.2744, the (18 June high), and then 1.2785 (50% of 1.3281/1.2288) act as hurdles to be overcome.
The dailies are running along pretty flat at this point in time, and although I suspect the immediate action is for some consolidation and a push higher, I would not be overly excited by the topside, as I suspect that we have really just moved the range up by a couple of big figures, and as I already said, the long term issues remain in place.
Support should see bids at 1.2625, and I doubt Asia will trade below here on Monday. If wrong, then expect a continuation towards 1.2580, where much of Friday’s European session was spent, and then 1.2550 (50% pivot of 1.2406/1.2692).
Conditions are going to be pretty volatile this week as the market forces reassert themselves and vie for superiority. I would therefore trade from a fairly short term bias as the markets unwind.
Asia, I think will probably do something like 1.2625/1.2700 which will allow the charts to unwind a little and then Europe may continue to take it a bit higher.
The shorts, as I said, had little chance to cut before 1.2600 and there are probably still quite a few out there hurting badly, and who will be squeezed in coming days, so for now the downside should run into plenty of buying interest.
In the longer term, I am by no means sure that we are done on the downside yet. The problems in Europe, have not magically disappeared, and as reality returns, I suspect that the pressure will resume, albeit that, right now, levels sub 1.2500 suddenly look a long way away.
Despite being a shortened week for the US (Independence Day – July 4), it is heavy on data, so plenty of chance for some extreme volatility. Tread Carefully!
Economic data this week includes:
M. HSBC China, EU, US manufacturing PMI’s
T. EU PPI, US Factory Orders
W. US Independence Day, EU Retail Sales, Germany Services PMI
T. ECB I/R Decision, German Factory Orders, US ADP Unemployment, US Jobless Claims
F. German I/P, US NFP/Unemployment
