EUR/USD Trading Psyche Favors Buys: Range Game Extends

Includes: ERO, EU, FXE, UDN, UUP
by: FXstreet

As one may have anticipated, the S&P's downgrade of Spain's debt, rather than spooking investors away from buying the EUR/USD, has actually strengthened the notion of a trading psyche. In which, by connecting the dots, the market is now predicting and subsequently pricing in reassurance over the activation of the OMT ECB program for Spain.

The S&P cut, coupled with a potential forthcoming debt rating downgrade by Moody's, is seen as the catalyst for the Mediterranean country to bite the bullet and tap the bailout fund. As a result, the euro is still seen as a good buy.

IFR Markets Analyst Adam Parry paints an excellent picture on the present trading psyche:

The most likely scenario is that Moody's junks Spain. That would start to see the Spanish bonds being pulled from sovereign benchmark indices, leading to some forced fund liquidation of paper. That will inevitably lead to some widening of Spanish spreads. The main trigger that will force Spanish PM Mariano Rajoy to go cap in hand to the ECB will be a sustained rise in Spanish yields. And we know, at current levels that is not the case. Any knee-jerk widening of Spanish yields - say back to the levels at the end of July - will almost certainly bring an end to the stand-off between the Spanish government and the ECB, activating the OMT and resulting in a deluge of bond buying.

On the EUR/USD front, it has been widely reported how the 200-day MA has been the level picked by market players to pivot price around, a theory that came true on Thursday again, with the spot rate initially pushing all the way back to the mentioned indicator at 1.2825 before finding solid bids and closing the gap back to return toward pre-S&P announcement. The euro strengthened further past 1.29 following comments from the Finnish government, announcing its 'green-light' on the "single bank supervisor" solution to bailing out the EU's troubled banks.

As noted by John Hardy, Head of FX at Saxo Bank,

The reversal in EURUSD sets up 1.3000 as the important resistance level from here and cements 1.2825/1.2800 as the critical range support." Kathy Lien, Co-Founder at BKAssetManagement, also supports the notion of 1.28 level being rock solid support for now. "Moody's decision is still pending and stripping Spain of its investment grade rating would most likely be sufficient to drive the EUR/USD below this support level."

In-house Technical Expert Valeria Bednarik has a firmer constructive view in the pair, and anticipates an acceleration towards the 1.30 round number on the assumption that an extension beyond 1.2970 is confirmed:

The EUR/USD hourly chart shows price consolidating well above the 1.2910 price zone while indicators lose upward momentum in positive territory. In the 4 hours chart the upward pressure increases as price stands now above 20 SMA and price continues printing higher highs and higher lows.

Earlier in Europe, the ECB published its monthly report, anticipating inflation to stay above 2% for the rest of the year and said that the ECB will ease later in 2013. The Central Bank made sure there is no misreadings on the Outright Monetary Transactions (OMT), saying is a "necessary, proportional and effective instrument" that "is ready to activate as soon as a country requests." On Growth, the ECB said

[It] is s expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

Another cause for the revival of risk appetite was better than expected U.S. jobs figures. As Kathy Lien adds:

Investors have been searching for reasons to believe that the decline in the unemployment rate last Friday is an accurate reflection of the labor market's performance. Today's jobless claims report suggests that the pace of job growth may not be as weak as the Federal Reserve fears. Jobless claims fell to a 4.5 year low of 339k, which is a sharp improvement from last week's levels. Before getting too excited however, the Bureau of Labor Statistics said the data is distorted by one state that did not process and record additional quarterly numbers.

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.