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.

Forex - EUR/USD close to 5-month low on debt contagion fears

The euro was hovering close to a five-month low against the U.S. dollar on Tuesday, pressured by growing concerns that the euro zone’s debt crisis was spreading to Italy as government bond yields rose sharply. EUR/USD hit 1.3838 during European early afternoon trade, the pair’s lowest since March 11; the pair subsequently consolidated at 1.3924, shedding 0.75%. The pair was likely to find support at 1.3751, the low of March 11 and resistance at 1.4061, the days high. Earlier in the day, the cost of insuring Spanish, Portuguese and Greek sovereign debt against default surged to euro-lifetime highs, while 10-year Italian bond yields rose to more than 6% for the first time since the inception of the single currency. Also Tuesday, Dutch Finance Minister Jan Kees de Jager said the possibility of a partial default by Greece in order to put the country’s debt on a more sustainable footing could no longer be ruled out, despite the European Central Bank’s opposition to such a move. The single currency also came under pressure after International Monetary Fund head Christine Lagarde said the institution was not ready to discuss a second bailout package for Greece. Elsewhere, the euro was trading close to a record low against the Swiss franc, with EUR/CHF tumbling 1.14% to hit 1.1583. Later in the day, finance ministers from all 27 European Union nations were to meet to discuss measures to contain the debt crisis. Options included increasing the size and flexibility of the euro zone’s bailout fund, the European Financial Stability Facility and lengthening the maturities of loans and lowering interest rates for bailed out countries.