After declining 1% on the day, the EUR/USD has attempted to recover ground from the huge gap traded in the Monday opening. However, sentiment was looming and despite it rising from the 1.2880 area, the EUR/USD remains more than 100 pips below Friday's close.
The pessimism surrounding the euro remains intact, as the situation in Cyprus is far from solved. But despite some stabilization around the 1.2950 level, "Investors will look somewhere else for now," said FXstreet.com analyst Valeria Bednarik. The first reaction came from the UBS bank, who has cut its EUR/USD forecast for the one-month and tree-month windows, and after expecting 1.37 in the 1-month and 1.30 in the 3-month, the bank is now expecting the pair to head to 1.3000 in the 1-M and 1.28 in the 3-M windows.
The UBS analyst team believes that Italian elections and the Cyprus against deposit-holders "suggest the eurozone debt crisis is set to weigh on the euro again."
So the news from Cyprus added to the cocktail of uncertainty already stirring post-Italian elections woes with lackluster EMU fundamentals. In light of the upcoming preliminary manufacturing PMI prints in the euro area, traders are right to be pessimistic about the shared currency, as those represent another potential source of euro weakness.
Besides the eurozone's news, the Fed will come into action this week, and investors are expecting Bernanke to maintain the status quo. As Jane Foley, Strategist at Rabobank, points out, the greenback would likely find some support due to the recent improvement in the U.S. economy.
Rabobank expects "QE3 to continue until the end of the year. However, it is possible that the Fed may slow down the pace of assets purchases from its current $85 bln/month at an earlier stage." Foley says that "on the back of recent better U.S. data and given the risk of bad news from the eurozone, we expect to see dips to EUR/USD1.28 on a 3-month view."
The Days Ahead
After testing the 1.3000 area, the EUR/USD retraced to the 1.2925 level, but following the eurogroup meeting on Cyprus, the pair advanced to close the day above the 1.2950. As for the short term, " the hourly chart is showing price above 20 SMA and momentum in positive territory, although turning back lower. In the 4 hours chart, price was unable to overcome the 20 SMA, that stands flat, as well as indicators, around their midlines. While a definition on Cyprus levy may take up to Thursday, investors will remain reluctant to buy the euro, and range will likely dominate the pair."
Moving forward to Tuesday's docket in the euro area, Spain will sell 3-month Letras ahead of the EMU's Construction Output, preceding the more relevant ZEW Survey in Germany and the EMU. The UK will publish its inflation report and the so-called BOE Inflation Letter.
On the American desk, investors will be paying attention to the housing starts and building permits report.
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