Forex Flash: EUR/USD rally created a more solid floor – UniCredit

The EUR/USD rallied strongly during the week and rose from Monday’s low to Thursday’s high, 335 pips. “Some consolidation may now be the case, but his week’s rally has at least created a more solid floor, which should in turn make a break below 1.40 less probable,” wrote Roberto Mialich, analyst at UniCredit Bank in Milan. According to him, a solution to the US debt ceiling problem should likely favor EUR/USD because of a positive response by Wall Street. “ Thus, provided risk stays on, our target of 1.46 for 3Q11 may be reached earlier than we had anticipated.” The EUR/USD is retreating from 1.4440, moving further away from 2-week highs and trimming part of yesterday's gains. The pair is pulling back below 1.4400 and recently broke below 1.4375 and fell to 1.4360, reaching a fresh daily low. "The European shared currency snapped its earlier advance after lower-than-expected German report while the US dollar rebounded on hopes debt ceiling problem would be resolved. 

At the moment, the pair is trading barely above session lows, posting the first daily decline since the beginning of the week. 

EUR/USD Waiting for Politicians to Respond

This morning the EUR/USD rate is lower than it was a week ago – i.e. 140.50 against 142 a week ago. The debt challenges set the agenda in Europe as well as in the US. We expect that this will also be the case this week. The stress test of the banks held no big surprises, but nevertheless the market opens in a sour tone, since uncertainty prevails on both sides of the Atlantic. In Europe impatient financial market participants are waiting for a co-ordinated plan from the politicians and the ECB as to how to solve the debt crisis and the banks’ problems. An EU summit is scheduled for Thursday, which will hopefully be fruitful. Time will show whether it will be a repurchase, a restructuring or a combination. As long as nothing happens, uncertainty grows, and the euro is adversely affected.

The US is struggling with its public finances. Last week Moody’s and S&P warned about early downgrades of the US credit rating, unless an agreement is made to stabilise the ratio between debt and GDP for the medium term. Initially we are looking forward to Friday when Obama will hopefully manage to reach a political agreement. In the event of a downgrade, it is doubtful to what degree the US dollar will actually be adversely affected. This is based on the thought that the US dollar will still act as a safe-haven despite a slightly lower credit rating.

Overnight the EUR/CHF rate set a low at 113.74, but this morning the rate has returned to the level around 114.20. The SNB is coming under pressure, which is reflected in the fact that Swiss enterprises are considering the possibility of paying wages and salaries in the euro. The downtrend is intact, and the next test is the support level at 113.65.


EUR/USD (SELL): The EUR/USD trend is down.          
EUR/CHF (NEUTRAL): New low. New points of support. 112.50 and 110.00.   
EUR/GBP (NEUTRAL): EUR/GBP has fallen further to 87.30. We maintain our NEUTRAL recommendation but we are waiting for 86-86.50 for a Buy recommendation, if any.

US dollar: Moody's helps deal a double blow

The euro dollar exchange rate is 0.396% higher on the day with 1 EUR = 1.4201 USD at 9 AM in London. The pound dollar exchange rate is 0.087% higher with 1 GBP = 1.6118 USD. The dollar exchange rate was dealt a double blow over the past 12 hours. Moody’s put the US sovereign rating on review for a possible downgrade, citing a lack of progress in negotiations on raising the US debt ceiling. The dollar sold off in response, and losses were especially pronounced against the JPY and the CHF. Earlier, Fed Chairman Bernanke’s testimony to Congress set a relatively dovish tone and comments suggesting that the option for further
stimulus remains open stoked fears of another round of QE. Bernanke’s speech largely repeated themes from his June 22 comments but the Fed is clearly keeping an open stance on policy until a significant trend in data emerges. "While Fed Chairman Bernanke's Congressional testimony stuck largely to a familiar script on the still cautious outlook, markets were quick to react when he explicitly mentioned the possibility of further quantitative easing. What was overlooked were his remarks about Fed research suggesting that QE2 may only have lowered long-term interest rates by 10-30bp and raised jobs by some 30k per month. If this is all QE2 could do, why would another round of QE hold much promise for the economy? For further details, please see “What Promise In QE3?” says Gareth Berry at UBS. Elsewhere, the euro shook off uncertainty over the timing of a potential emergency meeting in the Eurozone and a Fitch downgrade of Greece. EURUSD traded 1.4131-1.4282. USDJPY traded 78.47-79.61. Eurozone core CPI and US jobless claims are due.