EUR/USD Prints Bullish Reversal; Spain Has Last Say On 'Bottom Found' Calls

Includes: FXE, UDN, UUP
by: FXstreet

EUR/USD left behind recent weakness, and after yesterday's bullish outside day off the 200 day MA, commentaries are starting to shift that an important low has been found, a dangerous proposition as far as the "state of affairs" for Spain aid request stand.

The EUR/USD squeeze came on the assumption that Spain is closer to tap the ESM for aid and thus activate the ECB bond buying programme, following a well accepted budget passage.

Spain bank stress tests needs eyed

Along Asian hours, first leaks over the Spanish bank stress tests were released, with James Glynn, Senior Economics Reporter at Wall Street Journal, reporting that "6 Spanish banks have been found to hold sufficient capital levels, while the remaining 8 that were stress tested will need more, according to reports."

Further details to come on the banks stress test will determine how much of the EUR 100 bln EU bank bailout Spain may draw; however, as NAB strategists note, "with the recent shifts in EU political winds also make it likely that however much is borrowed, the liability will end up on the books of the Spanish sovereign." Below the 60 BLN EUR threshold on capital needs, according to John Noonan, Head of IFR Markets, "may see EUR/USD pop higher."

Will the old buddy 1.30 be revisited? Below 1.2890 trouble is back

Going forward into the London session, market reports suggest selling orders tipped around the 1.2960/70 vicinity - 38.2 of 1.3170/1.2828 down move and September 15 high - ahead of the big 1.30 figure. On the downside, as long as the pair can hold 1.2890 and not regain the downside, looking for longs makes more sense than any other day of this last trading week. There is talk shorts taken earlier in the week start squaring up for weekend.

Sean Lee, Founder at FXWW, notes that in-spite-of the latest bullish turn, "the obvious broad range to play in EUR/USD is still 1.2815/1.3080 and until this breaks we should stay in range trading mode."

Kathy Lien, Co-Founder at BK Asset Management, remains prudent on the risk appetite recovery though, saying that "while investors are pleased by today's Budget, they still won't be satisfied until Spain bites the bullet and asks for help. Only then will uncertainty be removed, putting EUR/USD on its way to a stronger rally." In the meantime however, "investors will remain on edge, allowing only a moderate recovery in risk appetite," Kathy adds.

TDS Chief FX Strategist Greg Moore, also stresses the big issue pending resolution, which is whether Spain makes their official request for support; "While this week's market pressure on Spain likely has them closer to taking that step, we don't think they are quite ready yet." A lack of request for aid, according to TDS Strategist, "means risk appetite for the broader markets could dry up again, and this leaves us still biased to sell risk currencies into these small rallies for now." For the EUR, Mr. Moore sees "test to lower end of the bear channel (in the low 1.28 area) fairly soon."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.