The euro weakened on Friday and trimmed recent gains versus the dollar as investors were unimpressed by the EU Summit outcomes. A perceived lack of progress on a Spanish bailout request and Merkel assuring that Spain won't get retroactive direct bank recapitalization curbed demand for the single currency into the end of the week.
Euro retraces gains, upside potential persists
The euro retreated from the top of its recent trading range against the dollar on Friday after rallying to a 1-month high of 1.3140 this week on expectations Spain will ask for a bailout. EUR/USD retraced gains on Friday and was down 0.3% on the day at 1.3025, but held within the 1.2800 to 1.3170 range it has traded in since mid-September.
As the week comes to an end, interest continues to decline and in the absence of news from the eurozone, the EUR/USD is likely to close the day near current levels recording a 0.6% weekly gain. It remains to be seen whether the common-currency could find the strength to reach its September double top at 1.3170. Meanwhile, loss of the 1.3000 psychological support could signal a deeper retracement and would threaten the positive bias. It seems that once again Spain would have the last say there.
"Even with today's market moves, the week has overall been more positive than negative for risk appetites, with the US dollar somewhat weaker overall", says the Wells Fargo analyst team. "Our near-term bias remains neutral as we await further news from Europe, focusing in particular on a possible financial aid request by Spain over the coming weeks".
Meanwhile, TD Securities analysts argue that the EU summit hasn't change anything in the immediate future. "EUR/USD has drifted back from the mid 1.31 area this week and retains a soft bias intraday. We are not tremendous fans of the EUR from a fundamental point of view but we expect EUR/USD and the EUR crosses to remain better supported on dips for the moment", they explain. "Solid price action in EUR/USD in the past couple of weeks suggests to us that upside risks remain here".
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