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Moody's decision to maintain Spain's investment grade and speculation that Madrid will ask for a bailout pushed European markets and the euro up on Wednesday. The shared currency had already been trading on a buoyant tone since Monday and received another boost on the news that took it to a 1-month high versus the dollar.

The news is helping eurozone bond markets, with 10-year yields in Spain lower as the decision removed an immediate risk that Spain gets downgraded to junk category which could have led to some forced structural selling of Spanish debt by real money accounts.

In the US, housing starts surged 15% in September to a 4-year high, a sign that housing is helping to boost the economy and adding to the positive market mood. However, Wall Street indexes are having a hard time joining the global rally dragged by big declines in IBM and Intel.

Euro hits 1-month high, 1.3170 next target

The euro reached a 1-month high of 1.3136 during the New York session and technically speaking, the pair holds a bullish tone with 1.3172 (September's double top) as immediate target. EUR/USD was last up 0.5% at the 1.3115 zone.

At this point however, is still to be seen if the euro could gather enough strength to break above the top of its recent range as Spain seems to be the only catalyst for the currency at this point. So against this backdrop, could the euro overtake the 1.3170 level?

Focus will likely to remain in tomorrow's summit of European Union leaders, although no key decisions are expected at this gathering in light of the last meetings' results, so a pierce of that level seems unlikely. However, if EUR/USD does break above 1.3172, it will be at its highest in 6 months, leaving 1.2800 as an old memory and putting 1.3220 in the horizon.

"Short term the main risk for the up move in EUR-USD is that Spain might turn out to be more stubborn tomorrow than many market participants seem to be expecting at present. The initial euphoria might be replaced by increased skepticism as early as today", says the Commerzbank analyst team. "Headlines surrounding the Spanish aid request might cause movements in either direction but we still consider the lower end in EUR-USD to be the more vulnerable one. Following the psychologically important 1.30 mark the area around 1.2965 will provide support".

Senior Analyst at Danske Bank, Sverre Holbek, argues that there is an increasing likeliness of a decline in EUR/USD towards the end of the week. "However, we do not expect EUR/USD to drop significantly if Spain decides to wait with its request for help and we still target EUR/USD at 1.35 in three month's time".

Meanwhile, the Wells Fargo team states that "without an imminent event to break the market's optimistic mood, we see further near-term gains in the euro and most foreign currencies, and weakness in the U.S. dollar and Japanese yen".

Source: Euro Hits 1-Month High, Could It Break September's Peak?