The euro retraced gains on Tuesday and fell below the 1.3000 mark against the dollar as market sentiment deteriorated after Moody's downgraded five Spanish regions and a press report suggested Spain's 2012 budget deficit may be well above target.
Soft economic data is also contributing to market caution and has driven European and U.S. stocks sharply lower. A below-expectations report on manufacturing activity in the Richmond region did not help.
Looking ahead, the Federal Reserve's policy setting committee will begin a two-day meeting, with a policy statement to be released Wednesday.
Euro trapped in a range in the absence of European news
The shared currency lost ground on Tuesday in the absence of catalysts capable of pushing the EUR/USD above the 1.3070/80 resistance area. Instead, the pair fell below the 1.3000 mark, a level that was seen as key support to keep the short-term upward bias alive. However, EUR/USD held up well inside its 1.2800/1.3170 range where it has traded for over a month now.
The bigger picture remains neutral and it seems that the euro is waiting for Spain to determine its fate. A bailout request that would trigger the ECB bond-buying program could lift the EUR/USD as the USD remains weighed by the Fed's accommodative stance.
Technically speaking, the short-term picture does look bearish while daily charts show a more neutral perspective. Still, a recovery above 1.3070 would signal a continuation towards September double top at 1.3170; while on the downside, risks of retesting the 1.2800 area persist.
TD Securities analysts are changing their EUR/USD outlook to "a little more positive", from a technical perspective on the long term charts at least. However, the broad pressure on risk assets is still taking its toll on the pair, damaging its near-term outlook today: "In the case of further pressure on risk, and a push below 1.3000, it could be a fairly quick return to the 1.2900 area", wrote analysts Shaun Osborne and Greg Moore, pointing to mild resistance at 1.3081 (weekly high) ahead of the more significant 1.3140 area.
Meanwhile, Antje Praefcke, analyst at Commerzbank argues that after the EU summit didn't provide any new information on the issues important to the market, the euro is likely to be able to defend its position over the coming days as at least no news means no bad news. "Moreover the Fed meeting is likely to be unspectacular. The Fed is unlikely to ease monetary policy ahead of the presidential elections, even if it intends to do so. So there is no reason (yet) to sell the dollar on a grand scale, but doubts about a yes or no regarding QE3 will continue to put pressure on the dollar", Commerzbank analyst says. "In view of a lack of news, EUR-USD will continue to move in a narrow trading range which only saw an upward shift over the past few days".