Moody’s Wakes Up the EUR/USD

Looking forward to today’s trading; the calendar in Europe and in the US is thin. But the excitement is mounting with the EU Summit just a day away, news flow should keep markets hoping. The US housing starts and building permits are expected to confirm the recent improvement in the sector. These data should only be of intraday importance for EUR/USD trading. The focus will still be on Spain and, to a lesser extent on the earnings season. The recent news flow on Spain will fuel speculation that the country will ask for a precautionary credit line in a not that distant future, opening the door for the ECB to start buying bonds under its Outright Monetary Transaction program. There are still some obstacles, but Greece is coming closer to an agreement with its creditors, too. The euro and equities had already a good run of late and are close to important resistance levels. That said, we have the impression that that downside in EUR/USD is still rather well protected as the news flow from Europe remains constructive.

In the run-up to the earnings season, investors were quite nervous on the Q3 earnings and on companies’ the outlook for end 2012 and early 2013. After the first batch of Q3 earnings, we have the impression that market sentiment has improved a bit with respect to the outlook. For now, the market reaction to the earnings is not as hesitant as one might have feared at the end of last week. All this suggests that the euro positive momentum can stay in place. So, the focus will turn to the 1.3172 September top. It probably takes some more high profile news ( on Greece or Spain) for this level to be broken.

This was not the end of yesterday’s story. In the thin hours after the close in the US, Moody’s affirmed the Baa3 rating of Spain with a negative outlook. This action removes market fears that the Spanish credit rating might be downgraded to the non-investment grade status in the near future. EUR/USD jumped beyond the 1.3072 previous top and filled offers above 1.3120 overnight. For an in-depth analysis of the Moody’s rating action see our fixed income part of the report. The Moody’s action at least suggests that the steps that were taken by the EMU to address the crisis might improve the situation for the countries like Spain. Moody’s still assumes that Spain will ask for a precautionary credit line.

This morning, Asian markets are not overly enthusiastic on the rating action of Moody’s on Spain. Especially Chinese market underperforms the rest of the region. The cautious reaction in Asia is also capping the EUR/USD rally, at least for now.

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