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Has EUR/USD Found Support at 1.3500?

Last updated 11/22/2011 5:44 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro breaks to 1.3550 on short covering as Italian yields recede
• UK PSNB falls a bit
• Nikkei off -0.40% Europe up 0.26%
• Oil at $97.50/bbl
• Gold at $1691/oz.

Overnight Eco

• CHF Trade Balance (Oct)
• EUR Consumer Confidence (Oct)
• GBP Public Sector Net Borrowing (Oct)

Event Risk on Tap

• USD Gross Domestic Product Annualized (Q3)
• USD Gross Domestic Purchases Price Index (Q3)
• CAD Retail Sales (MoM) (Sep)
• CAD Retail Sales ex Autos (MoM) (Sep)

Price Action

• USD/JPY slips to 77.00 after spike to 77.35 earlier
• AUD/USD .9900 caps move
• GBP/USD slips to 1.5830 post PSNB
• EUR/USD 1.3350 caps move for now

EUR/USD saw a mild short covering rally in early European trade as yields in periphery bonds stabilized, but the move was capped at 1.3550 with the pair stalling after Spain had to pay highest yields in 14 years on  its auction of Treasury bills. Spain auctioned off three and six month paper today and although the bid to cover ratio rose above 3, the yield soared to 5.1% more than doubling from the 2.25% yield the auction prior.

Investors in the region continue to demand a massive premium for periphery credit, but the fact that credit markets were at least functioning was viewed with mild optimism by the currency market helping to push the euro higher. After surviving several assaults on the 1.3420 region in yesterday’s trade the EUR/USD appears to have stabilized and could push higher as the day proceeds if it clears the 1.3550 region forcing more shorts to cover.

One other factor that may be in play is yesterday’s  failure of the US super committee to agree to any deal on fiscal budget reform. The failure of the super committee in US to reach an agreement on the budget  will result in automatic sequestration of funds, most notably the elimination of the payroll tax holiday  and further unemployment benefits. Such a scenario could lope off as much as 1% off US GDP growth in 2012. Although the actual sequestration will not occur until eight months forward, the negative prospect of such an action could weigh on the dollar taking some pressure off the euro.

Elsewhere today in UK  the Public Sector Net Borrowing fell by a little more than expected to 6.49 Billion GBP from 7.17 Billion GBP the same period last year. The news suggests that Chancellor Osborne will meet his borrowing targets this year, but slower growth could make the task far more difficult next year if tax revenues are unable to keep pace with spending. Cable saw little reaction to the news but remained bid above 1.5650 level on broad risk appetite flows.

In North America today the calendar is relatively quiet. The market will get a glimpse of Canadian Retail Sales  which are likely to miss to the downside given the weak results on the wholesale front. In addition markets will also see the 2nd revision of US q3 GDP data with consensus view expecting  only a minor change to 2.4% from 2.5%. Overall the eco data is unlikely to have much impact on trade and currency markets are likely to be driven by more technical considerations as the EUR/USD continues to consolidate at the 1.3500 region. If credit markets remain calm and equities stage a rebound the pair could push to 1.3600 as the day proceeds.      

Note I will be out until next Monday November 28th. Happy Holiday.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.