After bottoming at 1.2825 on Thursday, the Euro has been trading in recovery mood against the US Dollar to close the week at 1.2955, just 60 pips below its opening at 1.3015 on Monday.
Said that, the EUR/USD remained well within its recent range 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.
The EUR/USD rose as high as 1.2991 in the European session but after the US opening bell the pair ran out of steam and it began to trade sideways between 1.2945 and 1.2955. The COT report shows this week a EUR net short of 73K vs 50K the previous. "I'm surprised to see the market jump back so eagerly into EUR shorts but that tells me that smart money is still feeling confident," commented Adam Button from Forexlive after the US closing bell.
But market seems to have taken the low 1.2800 zone as pivotal. "Wednesday's 'doji' candle and Thursday's strong extension higher (outside range day) underpin the bullish spin to price signals as the probe lower was strongly rejected," states TD Securities analysts Shaun Osborne and Greg Moore. "And yet ... weak momentum really means that there is little conviction in the price action-something that is perhaps reflected in the market in a non-technical sense as well."
"On the charts, EUR/USD remains better supported and this week's test of the low/mid 1.28 area (200-day MA at 1.2838) effectively keeps the bias towards the topside in the near-term at least," wrote TD Securities analysts, pointing to a short-term range break out if gains extended above 1.3030/50.
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.
Looking ahead the next week
All eyes will be on the EU summit next week although, according to the UBS team, it can turn out to be a non-event. Over the course of the coming weeks there are a number of events that could lead to more market tensions in Spain including regional elections in Catalonia and Galicia, the likelihood of more sour economic data and an impending ratings review from Moody's which could potentially judge Spain to be in junk territory. "These events have the capacity to push Rajoy into requesting a bail-out which no doubt would come as a relief to investors worldwide," said the Rabobank team.
Early on Friday, the big headline may come from the annual IMF/World Bank meetings, with IMF's Lagarde calling for less austerity and more time for the peripheral Eurozone countries. Later the Norwegian Nobel Committee awarded the European Union with the Nobel Peace Prize for transforming Europe "from a continent of wars to a continent of peace," said Chairman Thorbjoern Jagland.
TD Securities team pointed that the Nobel Peace Prize can inject the region's politicians with a stronger sense of fraternity in order to better tackle the region's problems with more conviction. "We are skeptical," they say.
Kathy Lien from BK Asset Management lists her most 5 risky event in the next week:
1. US Retail Sales
2. Minutes from Reserve Bank of Australia's Monetary Policy Meeting
3. Minutes from Bank of England Monetary Policy Meeting
4. Chinese GDP
5. EU Leaders Summit
"There are many unanswered questions that could be addressed by next week's calendar events," points Lien. "We are not talking about Europe's sovereign debt crisis, which is the main uncertainty crippling the market but clarity on the monetary policy outlook or economic performance of other countries."
On the bigger picture, Scotiabank's analyst Camilla Sutton expects the "EUR to trend lower into year-end and 2013, however in the near-term it appears content within its recent 1.28 to 1.32 range."
UBS, in Gareth Berry's research, has changed its outlook on the cross to bullish from neutral, adding "initial resistance is at 1.2978, a break above which would see momentum higher and trigger a move to 1.3072 ahead of 1.3172."
Karen Jones, Head of FICC Technical Analysis at the German lender Commerzbank, argues that the region at 1.3072 could well contain upside intents, then allowing potential pullbacks to test 1.2776, 3-month uptrend. She continues assessing "while above 1.2776 we remain unable to rule out a re-challenge of 1.3072 and possibly the 1.3173/77 band, we continue to favor failure here."
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