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The euro continued to move higher on Friday, but remained well within its recent range, while global equities advanced as eurozone optimism picks up ahead of the weekend. Why? While the timing of a Spanish bailout remains highly uncertain, there is growing consensus that an aid request is more likely than not after S&P downgraded Spain's rating on Thursday.

As such, a request would trigger ECB bond buying program and lead to a further reduction in the eurozone bond yields, it could at least bring a near-term boost to the euro and most risk-sensitive assets.

Meanwhile in the U.S., a report showed producer prices grew less than expected in September, leaving the Federal Reserve room to continue its USD-weakening QE program.

Euro rises with focus in Spain

The euro extended its bounce from a 10-day low of 1.2825 scored on Thursday, rising as high as 1.2991 at the beginning of the New York session before finding resistance at the 50% retracement of the broader 1.3172/1.2803 decline. EUR/USD was last at the 1.2980 zone, up 0.4% on the day but down 0.3% week-on-week.

Even though the pair remains in a consolidation phase as it has traded in a tight range roughly between 1.2800 and 1.3170 since mid-September, this week's test of the 1.2825 area (200-day MA) keeps the bias towards the topside in the near-term at least with 1.3070 coming into view.

However, the fate of the euro, will remain tied to the risk-on-risk-off fluctuation that at this point relies mainly on the eurozone and Spain in particular. That said, the EUR/USD is likely to remain rangebound until uncertainty about a potential Madrid bailout clears as many investors remain on the sidelines.

"We expect that the bailout will result in a collective sigh of relief by investors globally, at least for a few days if not weeks, as the attention would thus turn to Italy", says Christopher Vecchio, Currency Analyst at DailyFX. "As long as the EURUSD holds above its October low at 1.2800, we are bullish for the rest of the month."

The TD securities team also thinks that the broader trend in EUR/USD remains positive. However, "the underlying foundations of the EUR rally seem weak still considering recession pressures in the eurozone economy and the risk of renewed ECB easing," they explain. "It remains to be seen whether the EU being awarded the Nobel Peace Prize can inject the region's politicians with a stronger sense of fraternity in order to better tackle the regions problems with more conviction."

Source: Euro Relies On Spain To Define A Trend