The euro weakened on Monday and erased last week's solid gains as lingering concerns about the eurozone and the global economic outlook offset Friday's upbeat U.S. jobs data, ahead of a meeting of eurozone finance ministers in Luxembourg later today.
Spain is expected to top the agenda as uncertainty continues about whether and when the country may ask for a bailout.
The dollar and the yen, considered safe-haven currencies, rose after the World Bank cut its growth forecasts for China, and as investors remain cautious as the third-quarter earnings season gets under way. New York session is expected to be quiet due to the Columbus Day government holiday in the U.S.
Euro fails to extend rally, could retest 1.2800
The euro failed to extend last week's rally above 1.3070 as the boost from U.S. nonfarm payrolls faded. Instead, EUR/USD turned lower and fell to a 4-day low of 1.2936 during the European session. It was last down 0.4% at the 1.2970 area.
This setback evidences that investors remain focus on the eurozone woes, with Spain in the eye of the storm for the time being and that despite the optimism triggered by the announcement of the ECB bond-buying program last month, Europe is far from out of the woods. However, EUR/USD downside could remain limited as the dollar loses its shine in the wake of the Fed aggressive stimulus program.
The technical picture remains short-term bearish for EUR/USD, although with the pair correcting from oversold readings a consolidation phase could precede another leg-lower, with 1.2800 in sight. On the other hand, the 1.3000 area could cap any recovery attempt.
According to Gareth Berry, analyst at UBS, latest data-flow is dollar-supportive. "The latest US economic data releases paint a more constructive picture of the US recovery. The ISM surveys firmed and the US unemployment rate declined suddenly in September", he says. "The contrast with the state of play inside the Eurozone is growing increasingly stark, and whatever path the sovereign debt crisis takes next, the trans-Atlantic divergence in data flow is justification enough to expect EURUSD to trade heavy over time. We look for further dollar strength ahead".
Even though UBS team expects an eventual resumption of the downtrend in EUR/USD, it warns about the possibility of another leg higher. "A possible Spanish aid request and eventual activation of the OMT by the ECB could give the euro one last push higher".
In the same line, Jane Foley, Senior Currency Strategist at Rabobank, continues to view potential risks for the EUR to fall to the 1.2600 region in the upcoming weeks. "Medium-term, however, we expect an improvement in risk appetite and coincident USD weakness to allow EUR/USD to push towards 1.35 on a 12 mth view".
"EURUSD has broken back below 1.3000, below the minor trendline and below the flatline support that was resistance on the way up in the 1.2960/70 area", says John J Hardy, Head of FX Strategy at Saxo. "This now sets up 1.3000 as resistance and may see a full test of the 200-day moving average and recent low near 1.2800 in the days to come".
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