EUR/USD: 1.2260
With the China GDP coming in right on expectation during Fridays Asian session, the markets were, for much of the day left pretty much in limbo with nothing to do, but picked up the pace once the US got in and saw risk assets rally strongly, led by equities. The S+P finished 1.65% higher, the DAX +2.16%. The Euro, having made another new low early in the US session, at 1.2162, later spiked sharply to 1.2256 squeezing the shorts before closing at 1.2248.
The Italian bond auction on Friday was well received with €3.5bn of 3 years being sold at an average yield of 4.65%, compared to 5.3% at the June auction. This came just 1 day after Moody's cut Italy's government-bond rating to Baa2, just two notches above junk status. Moody's cited the contagion effects of a possible Greek exit from the EU and the never-ending concerns over Spain's banking system as the reason for the downgrade, which did not go down well with Italian politicians, with one calling it incomprehensible. Italian 10 Year yields moved back to just below 6% to 5.95%.
Looking ahead, we have plenty of EU data out in coming days to provide the excitement, but the direction will inevitably be led by news headlines with regards to the debt crisis. On this subject, Ben Bernanke will be closely watched on Wednesday (Asian session), for any hint of QE from the Fed. There has been very little of this over the weekend and Monday should open little changed from Friday's close.
Technically the Euro looks as though it wants to head a bit higher, which would allow the divergence on the 4 hour charts that we have previously mentioned, the chance to further unwind. The first target would be 1.2290 (23.6% of 1.2692/1.2162). Beyond that, there is minor resistance at 1.2335 before the 38.2% / trendline level at 1.2365. I would be doubtful that we get above this any time soon but if we do, congestion in the 1.2405/20 area should hold it.
The downside is now supported in the short term at 1.2210 and then at Fridays low of 1.2162. There are then bits and pieces all the way down to 1.2000, but this should remain untouched, at least, early in the week.
As I have said over the last 6 months, the first major target remains 1.1875, and there is a good case for a long term fall to 1.0300. Once any current squeeze has ironed itself out, we should make slow, choppy progress to the first of these. Right now , be a bit flexible. Allow the market to unwind and leave some room to find areas where the sellers are gathering before committing yourself to anything.
For Monday, all things being equal, look for 1.22/1.23 to cover it with a mildly positive bias higher, while at the same time keeping an eye out for negative comments emanating from the EU and the possibility of social unrest increasing, especially in Spain.
Economic data this week includes:
M: EU CPI, Trade Bal, US Retail Sales, Business Inventories
T: EU/German ZEW Survey; US CPI, Capital Utilisation. Bernanke testifies
W: EU Construction Output
T: ECB Meeting, US Existing Home Sales
F: German PPI
