EUR/USD – Volatile on Spanish Worries

EUR/USD is moving upwards following sharp losses yesterday (February 4th). The euro sagged as the markets reacted to political uncertainty in Spain, with allegations of corruption against Prime Minister Mariano Rajoy. The pair has recovered partially, pushing up into the low-1.35 range. There was good economic news out of Spain on Tuesday, as Spanish Services PMI was up sharply. Italian Services PMI and Eurozone Retail Sales looked weak, however,  as both failed to meet their estimates. In the US, today’s key release is ISM Non-Manufacturing PMI.

Spain is back in the headlines, but for a change, it’s not about the whether the country will ask for additional rescue funds for the troubled economy. Spanish Prime Minister Mariano Rajoy is involved in a complicated corruption case, and is accused of being involved in illegal transactions. Rajoy has denied any wrongdoing and has rejected calls to resign, but his party is losing public support and the issue could become a crisis for the government, which already has its hands full trying to keep the troubled economy afloat. The government is already deeply unpopular thanks due to worsening recession and staggering unemployment levels, and this latest political crisis could further undermine investor confidence. Spanish borrowing costs rose slightly following the news, as the markets nervously monitor the latest developments out of Madrid.

There was more political drama in Italy, another Eurozone heavyweight. Italian elections are always a heated affair, and the latest twist involves a derivatives scandal at the world’s oldest bank, Monte dei Paschi. One of the largest banks in Italy, it was forced to ask for 3.9 billion euros in state aid last year due to huge losses. Former PM Silvio Berlosconi has sought to capitalize on the scandal, blaming outgoing PM Mario Monti for providing funds to the bank. Both men are candidates in the upcoming election, in what has become a tight race. The scandal could affect the election, and has also put ECB head Mario Draghi in the spotlight, since he was the head of the Bank of Italy when the trades in question were carried out.

Putting political crises aside for the moment, the Eurozone economy has shown signs of life, as borne out by recent employment and manufacturing data. The highlight was the Eurozone Unemployment Rate which dipped to 11.7%, beating the forecast of 11.9%. Spanish, Italian and Eurozone Manufacturing PMIs were all slightly above the estimate, although all three remain below the 50 point threshold, indicating contraction in the manufacturing sector. The euro continues to trade at high levels after pummeling the US dollar in January. There is growing confidence in the markets that the bloc may have turned the corner and the worst is now behind us. However, many economic indicators point to ongoing weakness in the economy, and an unemployment rate close to 12% will not win any accolades. Still, there is a sense of optimism, and that sentiment can certainly be a market-mover.

Care to hazard a guess where the US economy is headed? US economic numbers continues to keep the markets guessing about the extent of the US recovery. The recent GDP release was a major disappointment, as the economy contracted for the first time since 2009. Employment numbers lost their recent shine, as NFP and Unemployment Claims failed to meet expectations, and the unemployment rate inched up to 7.9%. On the bright side, consumer sentiment and manufacturing data have been solid. UoM Consumer Sentiment climbed to 73.8 points, well above the estimate. ISM Manufacturing PMI  also was sharp, posting an eight-month high. With only a handful of key US releases this week, each one will find itself under the market microscope as the markets try to get a handle on the health of the US economy.

EUR/USD for Tuesday, February 5, 2013

EUR/USD February 5 at 10:20 GMT

1.3534 H: 1.3546 L: 1.3458

EUR/USD Technical

EUR/USD is showing some volatility, and is currently on an upward move after sharp losses on Monday. 1.3550 is providing weak resistance on the upside, and this line could face pressure if the euro continues to improve. 1.3627 is providing stronger resistance. On the downside, 1.3480 is the next line of support. This is followed by the round number of 1.34.

Current range: 1.3480 to 1.3550.

Further levels in both directions:

• Below: 1.3480, 1.34, 1.3350, 1.3280, 1.3240 and 1.3170.
• Above: 1.3550, 1.3627, 1.3690, 1.3745, 1.3796, 1.3858 and 1.3936 and 1.40.

OANDA’s Open Position Ratios

After a quiet start to the week, EUR/USD ratio is showing strong movement, in favor of long positions. This movement is reflected in the volatility we are seeing in the pair, which is moving up after sharp losses. Trader sentiment continues to remain firmly biased towards short positions.

After a spectacular January, the euro is showing that it can move downwards as well. EUR/USD took a tumble on Monday, but has recovered partially, as it trades back above the 1.35 line. If the political crisis in Spain deepens, we could see the euro again lose ground against the US dollar.

EUR/USD Fundamentals

• 8:15 Spanish Services PMI. Exp. 44.7 points. Actual 47.0 points.
• 8:45 Italian Services PMI. Estimate 45.9 points. Actual 43.9 points.
• 9:00 Eurozone Final Services PMI. Estimate 48.3 points. Actual 48.6 points.
• 10:00 Eurozone Retail Sales. Estimate -0.5%. Actual -0.8%.
• 10:00 Italian Preliminary CPI. Estimate 0.2%. Actual 0.2%.
• 13:30 US FOMC Member Elizabeth Duke Speaks.
• 15:00 US ISM Non-Manufacturing PMI. Estimate 55.2 points.
• 15:00 US IBD/TIPP Economic Optimism. Estimate 46.1 points.

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.