The euro remains trading quietly above the 1.3100 level against the dollar after breaking above its one-month range yesterday. The EUR/USD was closing Wednesday (at the time of this writing) at 1.3120 -- 0.50% above its opening price. The upbeat sentiment has continued weighing on the U.S. dollar and lifting gauges of risk appetite, after positive U.S. data, and on improved sentiment in European sovereign debt.
But the day wasn't calm. On the European side, S&P has downgraded Cyprus sovereign debt to B, as well as five Spanish regions and cities of Barcelona and Madrid. The Troika has finished its mission in Greece, and the IMF has called for a plan with a financing guarantee for Italy and Spain.
In this field, Eurozone officials have commented that Spain would ask significantly less than the €100 billion from the bailout fund when Rajoy's government makes its financial help request. But almost at the same time, a Spanish finance ministry official pointed out that the "Banco Malo" would assume between €85-90 billion in assets.
But market was focused on Moody's decision to maintain Spain's investment grade and its speculation that Madrid will ask for a bailout, and that pushed the European market and euro to one-month highs at 1.3140. Later, ahead of the U.S. market open, reports emerged that housing starts surged 15% in September to a four-year high -- a sign that housing is helping to boost the economy. This added to the positive market mood.
For a fourth straight day, the Dow Jones Industrial Average gained 5.22 points to end at 13,557. The S&P 500 index added 5.99 points, ending at 1,460.91. The Nasdaq Composite climbed 2.95 points to 3,104.12.
So what's next in the currency market? It seems the market is believing, and sentiment is buoyant. The next EUR/USD target is 1.3170.
EUR/USD Ahead Of Thursday's Key Events
As Kathy Lien from BK explains in a recent article, "...better than expected U.S. data and the hope that Spain will eventually ask for a bailout helped to ease the tension and the anxiety in the financial markets but what is missing from the equation is China."
And it is true that Chinese economic data has become very important across the market. Even more important than some developed countries like the UK, and "equally important as U.S. and European data if not even more so for countries that rely heavily on Chinese demand," Lien comments.
Chinese Q3 GDP data is scheduled to be published on Thursday at 2:00 GMT, as well as September retail sales, Industrial Production and its trade balance with the Chinese exports and imports levels. DailyFX's Currency Analyst Christopher Vecchio believes that volatility is expected on China's Q3 GDP on Thursday.
The Chinese GDP has fallen in the last six quarters, and the previous reading was the lowest in three years. The market expects the downward trend to continue, with a consensus at 7.4% YOY in Q3. So the caution ahead of the EU Summit and Thursday's Chinese data probably limited investors' enthusiasm today, to some extent.
On Thursday, the hope ahead of the EU leaders' summit could remain a dominant force. As such, the TD securities team believes that "this rally might have at least a little further to run. Above here, there isn't much in the way of a test of the mid-September high near 1.3170."
It's true that hopes for a Spanish bailout triggered a 200-pip rally since the close on Tuesday, closer to the four-month high obtained last month, at 1.3170/75 on the Fed's QE3 announcement. But "a spokeswoman for Spanish Prime Minister Mariano Rajoy said that Spain's position on the bailout -- undecided -- remains unchanged, it is important to note that PM Rajoy did say that he would only request assistance after conferring with other Euro-zone leaders -- which could come as soon as this week with another Euro-zone Summit beginning tomorrow," DailyFX's Vecchio wrote, expecting much volatility over the next few days on the EU Summit and China Q3 GDP.
"Although no key decisions are expected at this gathering, markets will be watching the headlines for any signs of progress towards further assistance for Greece or Spain," Wells Fargo analysts commented. "Without an imminent event to break the market's optimistic mood, we see further near-term gains in the euro and most foreign currencies, and weakness in the U.S. dollar and Japanese yen."
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