Euro Hit By S&P Downgrade, But Decline Remains Orderly

PRLog (Press Release) - Jan. 16, 2012 - Early last week, tensions on the intra-EMU bond markets eased. Finally this triggered also a rebound of the euro on Thursday. However, the positive momentum could not be maintained. Intense rumours on an S&P rating downgrade of several European countries (which was confirmed after the close of the markets) trigged a new sell-Europe move. EUR/USD had to return Thursday's gains.

EUR/USD reached a recovery high in the 1.2880 area just be for the open of the European market. However, the rebound/short-squeeze from Thursday could not be maintained. Despite the successful Spanish bond auction on Thursday, investors remained cautious going into the first Italian bond auction of the new year. This caution was justified. The outcome was decent, but much less spectacular compared to the Spanish one. EUR/USD dropped below the 1.28 barrier after the publication of the auction results. The earnings of JP Morgan also failed to support the fragile market sentiment as was the case for the weaker than expected US trade balance. Earlier in US trading, there was a flood of market rumours that S&P had informed European officials on a downgrade of the credit rating of several European countries including France. This news trigged a new 'sell-Europe' trade. Equities nosedived and EUR/USD dropped to a new correction low. Negative headlines on the Greek PSI talks intensified the decline of the single currency. As US markets were heading for a long weekend, a lot of investors were probably extremely cautious to keep EMU exposure over this long weekend. The pair reached a new low in the 1.2625 area late in Europe. After the clause of the European markets, the decline of the euro slowed, even as the news flow on the S&P downgrade became more detailed. EUR/USD closed the session at 1.2680, quite a decent loss compared to the 1.2814 close on Thursday. For an in extenso analysis of the S&P action see our KBC Flash report.

Today, US markets are closed in observance of Martin Luther King Day Holiday. The calendar of eco data is thin. Of course, there will be a lot of market talk on consequences of the S&P downgrade and other aspects of the EMU debt crisis, including the Greek PSI talks. The S&P downgrade is another hit for the already fragile investors sentiment on Europe and its currency. Especially, the context for Italy (BBB+) is becoming challenging. That said, as is most often the case, such a downgrade is not a big surprise for markets. In this respect, it was remarkable that the decline of the euro on Friday halted already before the official announcement of S&P. This morning in Asia, there is a logical negative reaction, however, the losses don't indicate outright panic. So, we assume that there will be some kind of a further negative repositioning on European assets and on the single currency. However, we don't expect a disorderly decline. Later this week, the calendar is only moderately interesting, both in Europe and in the US. So, the focus will remain on the EMU bond actions (Spain and France) and on the Greece. Especially visibility on the outcome of the Greek PSI talks is very low. After the longstanding decline at the end of last year and given last Friday's setback, quite a lot of bad news is probably already discounted. There is no good reason to expect the decline of EUR/USD to change at this stage. Uncertainty on pending issues will most probably still be used to sell the euro into strength. That said, we don't expect an acceleration of the decline. In a short-term perspective, we look out how to 1.2588 support fares. It is still early days to move to this kind of conclusion, but if this level holds, it might be an indication that a breather on the recent decline of the euro might be on the cards http://forexcapitalmultiplier.com/

Technically, the EUR/USD cross rate os captured in a standing downtrend that started at the end of October. In this move, the pair dropped below several important support levels, including the key 1.2867 area (Jan 2011 low). This othe way for another down-leg, with 1.2588 (August 2010 low) the next high profile target on the charts. At the end of last week, the decline of the euro slowed,but theS&P action caused EUR/USD to set a new reaction low at 1.2624. We look out how the 1.2588 level fares. If a clear break of this level fails, it might be a sign that the downtrend is becoming a bit exhausted. The pair regaining the 1.2858/79 area (Previous low/reaction high) would be a first sign that the pressure is easing. Sustained trading above the 1.2946/1.3197 (Neckline/reaction high) is neededimprove the ST technical picture. For now, we expect that this will be difficult. We don't change our euro negative bias, but in a day-to-day perspective we try to monitor how for this correction goes. http://forexcapitalmultiplier.com/index.php/FOREX-TRADING...