Euro Gains Seen Limited As Spain Uncertainties Persist

Includes: FXE, UDN, UUP
by: FXstreet

The euro trades slightly firmer against the dollar on Friday after Spain unveiled its 2013 budget that reportedly exceeded EU recommendations, opening the way for a bailout request that would trigger ECB assistance to lower the country's borrowing costs.

However, the euro's rally has been limited by uncertainty over when and whether Spain will effectively request EU aid. Moreover, Moody's rating decision on Spain is still looming and it is likely to be announced later today or next week, with a possible downgrade to junk status still in the cards. The Spanish government is also due to publish its full evaluation of the banking sector on Friday.

European markets turned negative after a positive opening, while U.S. futures also point for a lower start. In the U.S. front, the Chicago PMI is due for release along with personal spending and income data; however indicators are likely to have little impact on the EUR/USD as Spain remains the centre of attention.

Euro recovers ground but gains seen limited

The euro bounced off lows and reached a high of 1.2960 today, but gains are likely to be limited as debt woes persist in the eurozone. On the other hand, Fed's aggressive pledge for stimulus and the fiscal cliff in the U.S. make EUR/USD fortune a tough call for analysts.

However, with EUR/USD having retreated from a double-top of 1.3170 and finding support at 1.2828, in the short-term the single currency appears to be more of a range trade.

"The EUR managed to push above key short term support at 1.2900 yesterday, but generally neutral price action since then has not shifted the momentum gauges yet," says the TD Securities team. "If anything, the single currency appears to be more of a range trade in the very short term."

Meanwhile, Commerzbank analysts note that for the time being Spanish measures are unlikely to lead to a notable fall of the country's financing costs. "As a result the upward thrust in EUR-USD is likely to falter soon."

On the other hand, there are analysts that think the shared currency has set a base yesterday. "EUR/USD formed a classic bullish major reversal pattern (higher high, lower low, lower close) known as an outside session just above the 1.2828 retracement level, suggesting that unless it gets to a new low below 1.2827, an uptrend to 1.3045 onto 1.3160 would be likely to follow over the next week, supporting the view for a selloff in FI, as the latter seems to have strong inverse correlation to the currency pair," says RBS team.

In the same line of thinking, Rabobank argues "EUR/USD is currently well supported having bounced off the 200 day SMA yesterday (EUR/USD1.2826). Going forward this level will remain key support, though we do see the risk of sharper pullbacks on a 1 month view."

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