Euro Wavers Ahead Of Spanish Budget, Short-Term Risks Tilted To The Downside

Includes: FXE, UDN, UUP
by: FXstreet

The euro trade changed little versus the dollar while European stocks edged higher amid cautious optimism ahead of the announcement of Spain's 2013 budget, which could clear the way for a bailout request. However, European and U.S. markets gains were tempered by a mixed bag of U.S. data. Even though U.S. jobless claims fell more than expected last week, U.S. durable goods orders plunged to its worst since January 2007 in August, while the GDP missed expectations for Q2 and printed a mere 1.3% rise vs. 1.7% previously estimated.

Market focus on Spanish budget

Spain is due to announce its 2013 budget plan on Thursday together with other reforms aimed at improving the economy. According to the TD Securities analyst team, "The actual details of the budget are less important for the market reaction than any plan to request some sort of program that would leave Spanish debt eligible for ECB bond-buying."

"While market pressure has intensified, and foreign political pressure for PM Rajoy to make the request has remained behind the scenes, we don't think it has reached a breaking point for Spain to make an early request," they add.

Euro holds above 1.2835 but downside risks persist

Meanwhile in the FX market, the euro trades virtually unchanged versus the dollar at the 1.2870 area, having found support at 1.2835 on Wednesday. However, EUR/USD remains in one-week downtrend off 1.3171, 17 Sep high, printing lower lows and lower highs on daily basis.

Whether this is a merely corrective movement or a trend-reversal is still being discussed by analysts as the EUR/USD downside remains limited by the Fed aggressive stimulus pledge. In the short-term however, consensus points for a deeper decline in EUR/USD.

Danske Bank analysts see risk of further falls in the short-tern. "Today, the Spanish budget will take the limelight, not least in respect of EUR/USD. With Spanish 10-year yields back above 6%, the risk is still short-term tilted to the downside for EUR/USD."

According to TD Securities, a lack of request for aid from the Spanish government "means risk appetite for the broader markets could dry up again", they say. "That leaves U.S. still biased to sell risk currencies into these small rallies for now. For the EUR, that could see U.S. test to lower end of the bear channel (in the low 1.28 area) fairly soon."

Meanwhile, UBS analysts remain neutral. "Amidst this uncertainty, we view the EUR/USD as strictly neutral for now. The paramount risk is for further correction towards the 1.2758 level - a break below this mark would open the way to 1.2608", they say.

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.