The euro traded on recovery mode on Thursday after bottoming at 1.2750 to reach the 1.2840 level against the greenback. Currently, the EUR/USD is consolidating prices above the 1.2800. The USD traded lower against its major competitors ahead of Easter Friday and Italy as Wall Street rallied to record highs.
No bank runs in Cyprus, and the S&P at record highs. That's what this Thursday left in markets ahead of the Easter holiday that, in some cases, extend up to Monday. "The market felt sort of relieved Europe did not crash for good, while disappointing U.S. data sent speculators back to stocks," commented FXstreet.com analyst Valeria Bednarik. "It seems investors are pretty sure QE won't see the end this year. Profit taking on month end, added to dollar selling, although the EUR/USD recovery has been quite shy, and the bearish trend remains intact."
Economic data in the U.S. was a little bit disappointing, as the Q4 GDP was revised down to 0.4% from the previously expected 0.5%. However, it was well above the first estimated 0.1%. Chicago manufacturing PMI declined to its lowest level in 2013 at 52.4. The market is assuming that the Fed won't finish the stimulus in the middle term, as the economy is on track but doesn't have enough self-sustaining momentum.
As for the short term, the pair trades barely above 1.2800, "with the hourly chart showing indicators losing momentum and approaching their midlines, after the pair found buyers in the 1.2840 area immediate resistance," Bednarik said. "The downside continues to be favored, with a break below 1.2790 pointing to a test of 1.2730 price zone."
The euro was lifted by stronger Retail Sales and the EUR/USD traded higher on the European session. But it seems that sentiment won't resist too much, as big banks are forecasting short and middle term bearish movements. According to Research Analyst Gareth Berry at UBS, the Cyprus banks reopened, but EUR continues to look vulnerable. "The euro continues to look vulnerable against the Cypriot backdrop, ongoing political uncertainty in Italy, and the weak economic outlook across the eurozone." UBS' 3-month target is 1.2800.
Camilla Sutton, Chief Currency Strategist at Scotiabank, targets the EUR/USD finishing the year at 1.25. "On the back of recent developments in Europe, we have decreased our already bearish year-end EUR forecast to 1.25. The combination of developments in Cyprus, a revaluation of euro wide deposit risk, a lack of progress on the banking union, which is the only solution to ending the negative bank to sovereign feedback loop, are all highlighted by what has occurred in Cyprus over the last several weeks," Sutton said.
But on the other hand, BTMU says that the EUR/USD looks bullish ahead. Bank of Tokyo Mitsubishi UFJ analysts are bullish on EUR/USD for the week ahead and see spot moving between a range of 1.2650-1.3000. The bank believes that the fears over Cyprus will recede and the focus will shift to Italy. ""We may also get some movement toward the Italian president appointing an interim prime minister, which would alleviate fears over political uncertainty in Italy," the BTMU team said.
So Italy now... Pier Luigi Bersani, Secretary of the Democratic Party, has told Italian president Giorgio Napolitano that his party is unable to form a government, as he is facing unacceptable preconditions from the other parties.
The President Napolitano has scheduled a meeting with the party leaders Friday at 10:00 GMT, as he will lead the negotiations to form a government. In other words, pay attention to the new round of negotiations in Italy and remember that Europeans aren't too good at reaching fast agreements.