EUR/USD: 1.2310
On the "bad news is good news" convoluted theory of the way in which markets seem to work these days, risk assets again pushed higher, particularly equities, as hopes once more increased that some form of Central Bank assistance is around the corner, following Fridays 1.5% US GDP reading.
The gains from Mario Draghi's comments on Thursday have so far been maintained, but there needs to be some form of backup from the powers-that-be, otherwise this rally is going to prove somewhat short lived. It may be all well and good to " do whatever is necessary to save the EU", but the chronic debt and unemployment situations in much of Europe still remain and unless someone is able to come up with a plan to solve some of these issues, there is only one direction for the Euro to go. There is a danger that Draghi has put himself in a corner here though, which could unfold badly in coming days. The ECB have a mandate, and the German Bundesbank have been vocal in saying that it is definitely NOT ok for the ECB to do whatever it takes to save the EU, given that it is Germany that will be footing the bill.
Over the weekend though, Angel Merkel, in a joint statement with Italian President Monti, has endorsed Draghi's earlier comments and speculation will mount that she has given her approval of the ECB being able to buy Spanish debt. If so this would give the Euro a very solid base.
This week we have plenty of other options to provide volatility as well, with the FOMC being an early candidate on Wednesday. This will be followed up by the EU I/R decision/Draghi Press Conference on Thursday, and then on Friday by the NFP. By and large, the risk asset markets: - equities, commodities, Aud, Kiwi etc, are at the gate waiting for Bernanke to say the magic words, "QE3". If he does, we can expect a continuation of the current rally. If not, well we always have the Unemployment data on Friday to look forward to , and a soft number will just lead to hope of a move by the Fed in September.
One thing to note is that US Treasury secretary Tim Geithner will be in Europe doing the rounds this week. Whether there is a coordinated plan that is about to unfold, we do not yet know, but it will certainly keep the risk trade on the burner early in the week.
For its part, the Euro reached 1.2390 before retreating pretty sharply in thin late markets on Friday. The daily indicators continue to point to higher levels though and a retest of the highs may well be seen in days to come. The 4 hour charts continue to point higher as well, although they are in danger of becoming overbought, but a retest and break of Fridays high would test, firstly the 28 June low at 1.2405 and beyond there, 1.2438 (61.8% of 1.2692/1.2042) would attract. Above this we are back towards the 1.2520 area which acted as a magnet between May and early July.
The downside has minor support at 1.2290/10, and this could well support it through Asia on Monday. Below this, 1.2260 (38.2% of 1.2042/1.2390) and then 1.2217 (50% pivot) will act as interim support, with 1.2175 the 61.8% target, and looking out of bounds right now.
It could be that we need to chop around for a session or two as we await the FOMC, although there is plenty of secondary data out before then to provide some short term volatility - see below.
It looks to me as though dips will meet good demand early in the week and the momentum does still appears to have some wood to chop on the topside, but if we do see levels above 1.2400 again, one suspects that there will be plenty of interested sellers, so do not expect anything too directional, and although the bias currently looks mildly higher, we are only one news headline away from another turn south. Markets are going to be thin given the holidays/Olympics, so keep SL tight.
Economic Calendar this week includes
M: EU Consumer Confidence,
T:German Retail Sales, Unemployment, EU CPI, Unemployment, US Personal Income & Expenditure, Case Schiller Home Price Index, Chicago PMI, Consumer Confidence
W: EC Council, China NBS Mfg PMI, HSBC Mfg PMI, EU, US Mfg PMI , ADP Unemployment , FOMC
T: EU I/R Decision, Draghi Press Conference, EU PPI,
F:US NFP, Unemployment.
