EUR/USD: 1.2860The enthusiasm for Thursdays Spanish budget cuts did not last long, and as concerns persist , the Euro sank back towards the weeks 1.2828 low before finishing Friday at 1.2860, once again managing to remain just above the 200DMA at 1.2825.
The stress tests of the Spanish banking system, published on Friday, outlined that a further $59.3 bio will be needed to bail them out, although the government have indicated that they will tap the EU for only $40 bio of the $100 bio that has been set aside for that purpose.
The focus on the EU will remain, and as long as Spain holds off from seeking a bailout, the Euro will stay under pressure. Sellers will be cautious though, as the minute that Spain do ask for assistance, a knee-jerk rally will ensure that we are back towards, or above 1.3000,and bond yields will decline to a level where Spain can fund its debt. The structural problems will remain though. Unemployment at 25% is not going to disappear any time soon, and unrest is building and a bailout would only add further austerity measures and most likely increase the public disturbances. Rumours of Moody's downgrade of Spanish debt did the rounds on Friday. Nothing eventuated but if they do they will follow the Egan-Jones lead of last week and downgrade its debt to junk status, this could be the catalyst that finally forces Spain to ask the EU for help.
Catalonia is adding to the pressure by suggesting it wants to secede from Spain although that seems very unlikely to ever happen.
Elsewhere on Friday, end of quarter demand for the dollar did not help the cause of the Euro, and the market continues to have one eye on Greece where the situation gets no better. The finance minister will be meeting again with the troika this week (EU/EC/ECB) for mare bargaining on the terms of the release of the next tranche of their bailout package.
The week ahead is a busy one for data with the highlights being the ECB meeting on Thursday and we may get a rate cut given that much of the EU is in recession. Friday sees the US unemployment data/NFP which will be even more keenly watched than usual, being the first data since the Fed introduced QE3, when they announced that they would continue adding liquidity until the employment rate improved. Monday kicks off with the official China Mfg PMI.
Although it all looks pretty bleak for the Euro, the situation for the dollar is not that rosy either and with QE3 now a done deal, it looks unlikely that the dollar is going to run away to the topside. Thus, it appears that we should expect more of the same choppy conditions within a 1.26/1.31 range.
The daily charts suggest that any early week action will be to the downside and a break of the 200 DMA (1.2825) would most likely see an acceleration towards 1.2742 (38.2% of 1.2042/1.3171) and then on to the rising trendline support at 1.2660, ahead of the 50% pivot at 1.2607.
The resistance will now start at 1.2907 (23.6% of 1.3171/1.2838) and then 1.2957 (38.2%) , where the Euro failed at the high of Friday's session. Beyond there, 1.3000 is the 50% pivot of the move down from the highs and that won't be seen in the next few sessions unless Spain pay a visit to the EU.
For Monday, use 1.2800/1.2900 as a guide with a mild downside bias.
Economic data this week includes
M: China Official Mfg PMI , EU, German, US Mfg PMI, US Construction Spending, ISM Mfg PMI
T: EU PPI
W: German Unity Day holiday, German Services PMI, EU Retail Sales, US ADP Employment, ISM non -mfg PMI
T: ECB I/R decision, US Jobless Claims, Factory Orders, FOMC minutes
F: German Factory Orders, US Unemployment, NFP.
