EUR/USD Falls Below 1.2850 Zone

Includes: FXE, UDN, UUP
by: FXstreet

The battle for the 1.2900 level seems over at least for a while. The EUR/USD has been trading close to the 1.2900 level almost the whole American session but lately, news from S&P downgrading Spain to BBB- from BBB+ with outlook negative has launched the pair below the 1.2850 area.

After two days of declines, the EUR/USD was struggling to reach its first positive session but all efforts were futile following the S&P announcement. The pair has failed twice around 1.2910, Fibonacci resistance level, the EUR/USD surrendered late US session, falling back below the 1.2850 area as American indexes took a nose dive.

Rating agency cutting Spanish rating to BBB- from BBB+, matching now Moody's, is only one factor weighting in the pair: the little market confidence so hardly acquired after the announce of OTM by the ECB early September is being quickly eroded as uncertainties over whether and when Spain will apply for a bailout, and the fact that Greece is unable to face its obligations

Mauricio Carrillo from pointed in his twitter account that Standard & Poor's was saying to Spain: "Better you do ask for the bailout." Ashraf Laidi from City Index commented on the resemblance between Spain's Rajoy and Greece's 2010 Papandreou, "It took 5 downgrades and 500 EUR pips to get him to ask for help."

"Europe has been just winning time, and is now running short of it," states Valeria Bednarik's Chief Analyst. "In the meantime, the EUR/USD trades heavy early in the Asian session, falling sharply from the mentioned Fibonacci resistance and looking for a test of the 1.2834 low set early Wednesday."

In the short term, "the hourly chart shows a strong bearish momentum building up, while in the four hour chart, indicators head back south after correcting oversold readings, all of which supports further falls," says Bednarik. "Keep an eye on past week low of 1.2803, as once below, the pair may attempt to test the 38.2% retracement of the latest daily bullish run around 1.2745."

However, EUR/USD jumps should not be dismissed, especially if Spain requests a bailout and triggers the implementation of the ECB's bond-buying program (OMT), whose uncertainty has kept many investors on the sidelines these days. UBS' FX Strategist Chris Walker thinks that the aggressive ECB intervention on OMT could push the EUR/USD above 1.3000 but "that would require action soon." With the delay, now the UBS analyst expects to "see lower EURUSD levels first."

Technically, "the recent weakness suggests scope for further correction to 1.2804 and even 1.2741," points Walker. "Near-term resistance is at 1.2991 ahead of 1.3072."

On stocks, overall sentiment remains under pressure as markets favor risk aversion on Spain and earning session. U.S. stocks ended lower Wednesday, with the S&P 500 down for a fourth successive day. Dow industrials dropped 128.56 points, or 1% to 13,344.97. The S&P 500 slid 8.92 points, or 0.6%, to close at 1,432.56. The Nasdaq Composite shed 13.24 points, or 0.4%, to finish the US session at 3,051.78.

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.