A week ago the single currency was posting highs in the vicinity of 1.3140, in an upbeat context of voices claiming that 1.3200 and beyond were within reach. The rest of the FX community just followed suit, as risk appetite has since been dictating the ebbs and flows of the market.
Seems that the cheerful panorama along with investors' hopes were initially undermined when some Spanish officials spread the rumor that the call for financial aid would be more distant than previously estimated, even wished for. We can't assure that that was the break-even point, but it's right to say that since then the sentiment surrounding the euro was not the same. Some sort of intraday consolidation followed, until we hit the wall again, and again, and again…
Euro zone fundamentals have demonstrated once more how far they are from the slightest attempt of returning to the recovery path. Preliminary manufacturing and services PMI prints have awoken the euro zone members from their rosy dreams, and later worrisome German IFO series have poured cold water over them - and the sell-off did not wait. Pressure dragged the bloc currency to the proximities of 1.2920, almost exclusively on euro weakness.
However that's not all folks! The FOMC statement promises to put EUR/USD to the test again, though on this occasion, swings in the cross would come from the greenback's side, which has been rallying since last Wednesday, measured by the US Dollar index.
Pressure will remain on the cards
According to analysts, the euro is now debating whether to continue its march south, which has already started, or regain traction around the key mark at 1.2900; recall that when we talk about downside, the Spanish bailout and the ECB OMT program rhetoric comes into play, acting as a credible net for euro bears.
Karen Jones, Head of FICC Technical Analysis at Commerzbank, argues that "EUR/USD has eroded interim support at 1.3000/1.2995 which leaves the focus on key support at 1.2877/36 (200 day ma and uptrend). The 200 day ma has been the focus of a lot of attention recently and failure here would be viewed as psychologically negative." The expert also comments that corrections higher would find a barrier in the area of 1.3046/84 followed by the 1.3140/80 region.
Derek Halpenny, European Head of Global Markets Research at BTMU, assesses that "euro upside remains limited," weighted by the rising concerns about Greece, the delicate situation of Spain after Moody's downgrade and a bigger-than-expected contraction of its GDP and recent statements by ECB officials, saying that the OMT purchases would be carried on in a more conservative way.
Against a backdrop of increasing deterioration in the Spanish fundamentals and despite the recent positive political results in the last regional elections and the well-received short-term auction of Letras, Senior Currency Strategist at Rabobank, Jane Foley, comments, "While the degree of any market tension over the weeks ahead will likely be calmed by the knowledge that the ECB's OMT awaits, we see risks of pullbacks in EUR/USD potentially to the 200 day sma at EUR/USD1.2836."
Thursday should be interesting
Euro docket will kick in with German retail sales, followed by a measure of Italian Consumer Confidence. GBP traders will scrutinize the preliminary GDP figures for the third quarter and retail sales in Italy will close the data front in Europe. Across the Atlantic, US durable goods orders and the weekly report on the labor data will grab all the attention. Moving forward to the Asian open, Japanese inflation figures will be published.