EUR/USD: 1.2900The Euro soared again, to 1.2935, following the German Court ruling that the ESM bailout fund is not illegal under German law, allowing ratification under certain conditions, including that German liability does not exceed Eur 190 Bio without lower Government house approval.
It got pretty choppy as the verdict was announced, with the Euro initially spiking lower to 1.2815 and then spending the next 15 minutes in pretty violent price action while testing the highs.
That did not really change too much over the course of the session and with the vote pretty much anticipated and with much of the gains having been written in, the Euro spent the rest of the day consolidating its gains while waiting for the FOMC decision later on, and we are now 50 points above the levels of this time yesterday.
The result of the German Court ruling saw Italian and Spanish Bond yields head lower to 4.5% and 4.99% respectively, while German bunds headed higher to 1.63%. European Equities ended pretty steady after a volatile session, with the Dax +0.46% and the EStoxx50 +0.28%. In the US, the S+P is barely changed +0.1%, ahead to the FOMC.
With regard to the FOMC, the market feels to me as though it may have got a bit ahead of itself in its expectations that Ben Bernanke will today announce a programme of monetary easing through QE3. If the Fed merely extend the timescale of expected low rates until 2015, without actually implementing any immediate QE3, then the dollar will soar. - we shall have to wait and see. In the meantime the market is happy to assume that QE3 is more or less a done deal.
Elsewhere today, with the German ruling out of the way, it appears that the Spanish PM, Rajoy is slowly but surely heading towards asking the EU for a full sovereign bailout.
In Greece, the Troika increased the demands, in order that the Greek Government can receive the next tranche of the bailout package, which will only inflame further public unrest.
Technically, the Euro is trading quietly just below the 1.5935 high and this is likely to continue until we get some light on the Feds decision, later in the session when Bernanke speaks. Having reached 1.2935, the Euro has fallen back below 1.2928 (61.8% of 1.3483/1.2042), which acts as immediate resistance and will prove difficult to overcome. If /when it does manage to, then expect further gains to 1.2973 (16 Feb low) and then to 1.3000. The next Fibo level is not to be found until 1.3137 (76.4% of 1.3483/1.2042).
It is going to be necessary to be very nimble up here. The market will be volatile and the degree of divergence and overbought conditions in the indicators suggest to me that we are near to seeing a nasty reversal to the downside. Any announcement of QE3 of course will negate the
immediate chances of this, but at some stage the charts will need to be allowed to unwind.
The downside for the next few hours should be limited and today's session low of 1.2815 should easily cover it. Beyond there the first meaningful Fibo support is to be found at 1.2726 (23.6% of 1.2042/1.2935) and then at 1.2595 (38.2% and previous channel resistance - turned - support).
The daily indicators are undoubtedly pointing to higher levels ahead, but with the shorter term oscillators being overbought and showing divergence, stay flexible and leave stops in place.
