EUR/USD: 1.2120
More bad news from Spain saw the Euro make another 2 year low at 1.2145 on Friday after the region of Valencia asked for a bailout from the Spanish government, placing it under pressure, and increasing the possibility of Spain requiring a full bailout of its own from the EU . The Government also cut the growth outlook for 2012/13 from +0.2per cent to -0.5per cent and Spain looks likely to remain in recession for the foreseeable future. 10 Year Spanish bonds rocketed to 7.3per cent, while the IBEX collapsed by 5.8per cent, dragging the other EU bourses down with it . To top off a bad day for Spain, ratings agency Egan-Jones cut its credit rating, now at junk status, for the sixth time since mid-April The Euro was really one way traffic as the bad headlines rolled out of Spain, with more downward pressure likely in the coming week.
Elsewhere in the EU, the ECB raised the pressure on Greece by declining to accept Greek government bonds as collateral for ECB funds, until after the troika review of its bailout programme has been completed.
Meanwhile, ECB Governor Draghi in an interview with Le Monde has stated that the Euro is 'irreversible' and that currency union is not in danger of collapsing. The EU bureaucrats seem to be from a different world. I guess he has to talk up the situation, but the markets certainly aren't listening.
EU issues aside, the economic highlight next week will be Fridays release of the US Q2 GDP, which will be watched closely for the possibility of any change of heart from the Fed regarding the possibility of some economic stimulation, through QE3. Expectations are currently for a rise of GDP 1.3per cent, but we get Durable Goods Orders on Thursday, so that could yet change. We also get a fair bit out of the EU/Germany, including the PMI's and if the overall trend remains softer, it will do little to help the Euro.
Technically, we continue to make incremental jumps lower, intermingled with the odd bout of short covering. I doubt very much is going to change in the coming week, unless the US GDP is a disaster, at which point the market will again become excited about QE3 and will busily sell the dollar, giving some short term solace to the Euro, until normal service is resumed and the Euro inches lower again.
1.2144 now becomes the level to break and it may prove tough in the next session given that 1.2136 is 50per cent of 0.8225/1.6037. Below this lies psychological support at 1.2100 and then 1.2036 is 61.8per cent extension of 1.4940/1.2625 commencing at 1.3475..
Eventually we are going to see 1.1875 (4 June 10 high) and possibly the long term target at 1.0350. Given the slow motion crash that is taking place in Europe, this will take a long time, so don't get too excited about a quick move. For the next few weeks, while the Olympics are in progress and the Northern Hemisphere holiday season is under way, it would not surprise if the Euro chops around without going anywhere too far at all, although the pressure should remain to the downside.
Although it is making new lows every few days, the daily MACDs are showing some divergence, and so a bounce at some stage, to allow them to unwind, would not surprise. It could well be that we do see some quick follow through toward 1.2100 early Monday in thin markets, given the constant stream of negative headlines, but keep an eye on the divergence, warning of a possible bounce. The topside now has short term hurdles at 1.2215 and then the first Fibo resistance is at 1.2267 (23.6per cent 1.2690/1.2144). 1.2335, which we were unable to conquer last week is the next barrier, above which 1.2405 is 23.6per cent of 1.3286/1.2144.
To summarise, initial pressure in the coming week remans lower, but given the divergence on the dailies I dont think we should be expecting too much against the Dollar. The crosses against the commodity bloc are a different matter and look as though the trend there is set to continue.
Economic data this week includes
M: -
T: HSBC China Mfg PMI, EU/German Manufacturing/Services PMI, US Mfg PMI.
W: German IFO, US New Home Sales
T: German Consumer Confidence, EU Eco Fin Min meeting, US Durable Goods, Jobless Claims
F: German Retail Sales, CPI, EU Consumer Confidence, Spain Unemployment, US GDP, Rts/Michigan Consumer Sentiment Survey
