EUR/USD: What Side Of The Coin To Read After The S&P Spanish Downgrade?

Includes: ERO, EWP
by: FXstreet (Barcelona) - Sentiment to trade the EUR/USD was almost nonexistent during the last U.S. trade, with the pair well supported above its 200-day MA at 1.2820. More lively moves were seen at the U.S. closing bell, after the S&P rating agency had a two notch downgrade to Spain's debt, to now stand just one notch above junk at BBB-.

While calls over a 'non-imminent technical breakout' in EUR/USD are still logical, with the market comfortably pivoting around the mentioned 200-day-MA, the risk for the low range bidders to bail out themselves is certainly increasing. At this point, still no significant technical statement can be interpreted from the current range action, however the last setback for Spain certainly carries some additional risk for the Euro not to be overlooked.

Two sides to the S&P story

EUR buyers should be careful for several reasons. If the market intensifies its discomfort and further discounts the Spain bailout still being few weeks away, and thrown into the stew is the anticipation of more expensive financing conditions by Spanish authorities through higher benchmark 10-year Spanish bond yields, then we have a case for EUR to trade top-heavy in the days to come and the risk of a downside range breakout may increase.

Another valid point is that the S&P decision pushes Spain to finally ask for the bailout, then we could experience further EUR/USD range for days. Sean Lee, Founder at FXWW, notes "the downgrade is not necessarily bearish for the EUR as Spanish bonds are still investment grade and this S&P move might encourage Spain to ask for the bail-out."

As noted by Ivan Delgado, Head of Asian Editors at, "it is certainly not an easy equation to resolve, as on one hand we have the Euro group potentially forcing Spain to ask for the rescue when they meet on Oct 18 at the EU Summit, while on the other hand, Spain has a regional election in Galicia on October 21st , a long-held stronghold for Spanish ruling party Partido Popular, thus seems illogical to think they will bite the bullet ahead of it, unless bond yields go ballistic again. In summary, chances are Spain will want to hold out any unpopular bailout decision before the Galicia elections as they may otherwise commit a political suicide."

EUR/USD playing with fire along range lows

Shorts have been rather frustrated so far, will they use the S&P downgrade as an excuse to rejoin forces and do some meaningful concerted bearish action?

EUR/USD is not looking constructive, with trailing stops below 1.2850 being blown up in early Asian trade only to gently recover above the level ahead of the European session. From a technical standpoint, still looks wise to play a 1.2820 - Oct 1 low - 1.2885/90 - Oct 3 low - range intraday.

As long as the 200-day MA is supportive for buyers, a mild bullish bias makes more sense to maximize risk reward scenarios. Daily momentum studies are mixed, and Wednesday's G-7 headlines look like the only potential event that might provide some short term spikes at best.

From Sean Lee: "The market always picks some level to focus on and in the case of the EUR/USD it's been the 200-day MA. This comes in today around 1.2820 and there are certain to be stop-loss sell orders below there. Interbank dealers still report plenty of buying interest starting at 1.2820 and staggered down through 1.2800, so I'm not expecting any vertical collapse."

According to Fan Yang, Technical Strategist at FXTimes, despite the 4H chart shows that there is more downside risk for a swing projection to target 1.2707, "there is a support/resistance pivot at 1.2750 and even above that, maybe even above 1.28, the market will be challenged by a key rising trendline that goes back to the 1.2042 low in July" he notes.

Against the S&P downgrade background, Mitul Kotecha, Founder at Econometer expects "the EUR to continue to drift lower, with the currency set to test support just under the 1.2800 level."

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.