EURUSD Analysis 19th June – Euro Pares Gains

(Forex-FX-4X, London) The risk of a Greek Eurozone exit has faded into the background for now, the result of the elections brought a victory for the pro-bailout parties and the market has returned its focus to Spain.   Markets had an initial period of optimism after news came through that Greece’s centre-right New Democracy party would aim to forge a coalition with other parties and the euro/dollar rate gapped higher on Sunday.

However, investors forced Spanish borrowing costs to the level which Portugal Greece and Ireland needed additional help; Spanish 10Y bond yields climbed over 7.13% which is the highest level recorded.  Add to this the fact that the results from the banking stress tests are due this week and its easy to see why the EUR dropped today.  It now also appears that the markets will not be seeing the bazooka effect and massive liquidity which was looking like a possibility from the central banks at the back end of last week.  Markets had rallied somewhat due to this and with the likelihood of additional easy money now fading the US dollar’s downside trajectory has been halted.

• Event risk this week comes via the G20 Mexico meeting, Wednesdays FOMC rate announcement (will Bernanke launches another round of QE/extend Operation Twist) and the German Ifo Business Climate data on Friday.
• We still see 1.2650 as being a key level for the EUR/USD and the strong close below this area is hinting that further downside could be ahead.
• On the flip side, from a technical perspective, price has now triggered a higher low on the daily chart and a break above the weeks high would potentially bring the 1.3000 level back into focus.  This was a strong support area which could likewise see resistance if hit and would be closely monitored by technical traders.
• The EUR/USD uptrend remains intact, but is vulnerable to news based around Spain and Italy as the 17-nation single currency looks to be at the mercy of  risk aversion flows stemming from the euro crisis.  We prefer to stay on the sidelines for now as selling at current levels would be too close to multi-year lows. It should also be noted that the key 1.2500 psychological round number level is close below.