The Euro began the week under heavy pressure amongst an increasingly nervous and information-starved investment community before appearing to make a comeback mid-week against the USD. This rally was short lived as news from the ECB and re-ratings by Moodys painted a bleak picture for the currency towards the end of the week. The coming week may also be particularly tense for the Euro as the market, rumour-generators and politicians look to whether Greece will repay its debt on Friday. Even if this happens, there will still be a sense of anticipation that this is merely only delaying the inevitable rather than solving any problems.
The fact that the ECB opted to maintain interest rates was perhaps the most positive piece of news for the Euro, although sceptics suggest that this was a political move to allow President Trichet to depart with dignity. Instead of cutting rates, the ECB opted to buy covered bonds in an attempt to stabilise the market and ease fears of any future liquidity crisis which would be disastrous in the current climate. The decision to buy bonds as opposed to cutting rates also prevented the ECB from appearing to panic and surrender to the prevailing market pressure.
The downgrading of Italy and Spain by Fitch were negatively received by Euros traders, it appears that Spain is certainly more at risk of financial problems in the medium term than many had expected. Although its bond yield has not yet hit the 7% level required for a bail-out since spiking to around 6.5% in August, it is certainly a worrying situation that the sovereign debt solutions employed there are appearing not to work. Combine this with the omnipresent analyst warnings of another impending liquidity issue for Europe’s banks and it creates further downward pressure and the possibility of further destabilizing the Euro. In addition, the better than expected news from the US Non-farm payroll data that more jobs had been created in September than anticipated gave a glimmer of economic recovery in the US that is so obviously lacking in Europe. The USD continues to outperform the Euro as investors and speculators are still showing signs of uncertainty and wariness and preferring to back the safe and liquid greenback.
Technically the Euro may be set for further declines and the fundamentals are also supporting such a move. Looking at the four hour chart it appears to be sitting at the top of a large downward channel from the start of September. In its current state, and with market sentiment as it is, this trend line has a high likelihood of holding firm and bouncing the euro down to retest the lows of last Tuesday. To add to this, the daily EUR/USD is sitting just below a key area of support and Fridays close produced a significant, although not perfect, hammer candlestick pattern. This shows that the euro may struggle significantly in the coming days as the selling pressure at this point of resistance is so far proving strong.