EUR/USD, Spain Downgrade: The Catalyst Risking Range-Break?

by: FXstreet

The EUR/USD is nosedived in early Asian trade, breaking through 1.2850 as short-term bulls threw in the towel following the two notch Spanish downgrade by S&P. At a rhythm of 25/30 pips of losses per each notch removed, the pair made an Asian session lows at 1.2845 from 1.2905 at the U.S. close bell.

From a technical standpoint, we and other benchmark currency outlets have commonly argued that the market is still in range-bound conditions on the daily, with no imminent technical breakout that makes you anticipate the pair may unravel beyond last 2 week's familiar levels. The struggle of the EUR/USD to make any significant technical statement out of its range has been mainly due to the scarcity of catalysts, as the market awaits a Spanish bailout.

However, this holding pattern may be about to see a turn should the market throw now into the stew not just the fact of a Spain bailout still being a few weeks away, but also starting to price in the recent downgrade of 'Cervantes-land', which will certainly make the country's financing in the bond market more and more difficult, and as a result, benchmark 10-year Spanish bond yields may spike back toward the 6.5% and even 7% mark. If that is the case, EUR will be trading heavily, and the risk of a downside range breakout may certainly be increasing.

Another valid theory is that the S&P shocker may send Spanish authorities back to planet earth and hopefully making them realize it is pointless delaying further the inevitable bailout, other than to make in-mass favor to all those EUR-bears, growing as days go by. If this base case happens to be true, market movers will be unlikely to commit for a EUR/USD range break.

It is certainly not an easy equation to resolve, as on one hand we have the euro group potentially forcing Spain to act and ask for the bailout when they meet on October 18 at the EU Summit. Germany has been rebellious in supporting this case though. On the other hand, Spain has regional election in Galicia the 21st of October, a long-held stronghold for Spanish ruling party Partido Popular. Therefore it seems logical to think that unless bond yields go insanely back north again, the chances are Spain will want to hold out on any unpopular bailout decision that would sacrifice part of its sovereign powers.

From a technical stance: According to Fan Yang, Technical Strategist at FXTimes:

The 4H chart shows that there is more downside risk for a swing projection, which targets 1.2707. However there is a support/resistance pivot at 1.2750. Even above that, maybe even above 1.28, the market will be challenged by a key rising trendline that goes back to the 1.2042 low in July.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.