The euro weakened on Tuesday and fell below the 1.3000 mark against the dollar, weighed upon by broad risk aversion. Spain was at the center stage once again after Moody's downgraded five Spanish regions and a press report suggested the country's 2012 budget deficit may be well above target.
Market sentiment deteriorated, sending European and U.S. stocks sharply lower, with soft economic data elsewhere and downbeat corporate earnings reports in Wall Street doing nothing but adding pressure to risk assets.
Euro closes below 1.3000 ahead of FOMC decision
EUR/USD lost the 1.3000 psychological level on Tuesday and printed a 1-week low of 1.2951 before finding support, pressured by the risk-off environment. In the absence of economic developments or news coming out from Europe, the EUR/USD held within its 1.2800/1.3170 range, where it has traded since mid-September.
But the euro did lose the 1.3000, turning the short-term bias more negative. It was last down 0.6% at 1.2975. At this point, risks of retesting the 1.2800 area persist as long as EUR/USD stays beneath 1.3000, while a recovery above 1.3070 would signal a continuation towards September double top at 1.3170.
Nevertheless, the bigger picture remains neutral and it seems that the euro is waiting to 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 upon by the Fed's accommodative stance.
However, Commerzbank analysts believe the EUR/USD market is no longer that much volatile to the eurozone debt crisis, since the German CDS trades below 30bp for the first time since April 2010: "That means the crisis is no longer sufficiently virulent to affect EUR-USD to the same extent as it did over the past 12 months", wrote analyst Ulrich Leuchtmann, adding that, although the crisis is no longer playing a decisive role for the EUR/USD, that should change eventually.
FOMC decision not a game changer…
Looking ahead, the Federal Reserve's policy setting committee began a two-day meeting, with a policy statement to be released Wednesday. According to Marc Chandler, Global Head of Currency Strategy at BBH, given the proximity of the election and the fact that an open-ended asset purchase plan was announced last month (QE3 or QE+), there will be a great deal more talk than action at the FOMC meeting.