Overnight, Asian equities are also in the red, but the losses are not really excessive, given the sharp loss in the US yesterday evening. EUR/USD holding near yesterday’s closing levels in the mid 1.25 area.
Today, there are no important eco data in the US. So the focus will remain on global economic growth and on Europe. In Germany, the IFO Business climate indicators will be published. A further setback is expected. However, a further loss of momentum in Germany shouldn’t come as a surprise anymore. In the wake of the meeting of the EMU finance Ministers and the result of the Spanish banking audit, markets will look out for the next steps in process for Spain to draw on the €100B EMU credit commitment for its banking sector. As usual, the devil on these issues will be in the details.
The perspective that there is money to stabilize the Spanish banking sector is in theory a positive for risk and for the European assets. However, there are quite some complications. Funding from the ESM will raise the question off subordination of non-official Spanish bondholders.
In addition, as long as the debt burden of the support remains with Spain, markets will continue to raise questions on the sustainability of this construction. Investors might stay cautions on (European) risk going into the weekend. Markets will also look forward to next week’s EU summit. In this respect, investors will keep eye on comments from the EU F meeting. After the close of the European markets, Monti, Merkel, Hollande and Rajoy will also give a press conference after a meeting in Rome.
There is a still a lot of event risk, also on Europe. However, uncertainty on the global economy is gaining importance as a factor for global markets and for EUR/USD trading, too. In theory, one can raise the question whether fears for a slowdown, including in the US, should be that negative for EUR/USD. For the euro, a lot of bad news (from the cyclical side and from the institutional side) should already be priced in. However, yesterday’s price action indicates that EUR/USD is still an easy target in case of global uncertainty. So, for now we assume that the topside in EUR/USD remains difficult. EUR/USD is still developing in a sell-on-upticks environment.
Of late, this was seldom a good reason for a counter-trend, but the poor US payrolls report provided an excuse for a technical rebound that was extended till early this week. However, the next high profile level on the charts 1.2824 (21 May top) stayed out of reach.
Yesterday’s set back might be an indication that the correction/rebound has run its course. We assume that sustained trading beyond this 1.2824 level will be difficult. On the downside, the 1.2443/36 area provides intermediate support ahead of the 1.2288 year low.