Yesterday, trading on international markets was thin as several European markets and the US were closed for a public holiday. At the start of the new trading week, sentiment on risk wasn’t that bad. Investors drew some comfort as opinion polls in Greece indicated that the conservative ND parity is (re)gaining support. The news triggered some kind of a relief rally of EUR/USD as shorts were reduced after last week’s steep losses. EUR/USD reached a correction high in the 1.2625 area early in European trading. However, the move lacked power and ran soon into resistance. The uptick was used to further offload euro long exposure. Later in the session, a similar pattern was seen on most European equity markets.
During the afternoon session, sentiment on European markets faltered further. The positive ‘reaction to the Greek polls was reversed as several headlines on the Spanish lender Bankia hit the screens. The troubled Spanish lender received €19B to address a capital shortfall. At the same time there was also still a lot of uncertainty on financial position of the Spanish regions. Spanish spreads were sharply wider, reaching 500+ levels. EUR/USD was already off the highs and the sell-off accelerated late in the session. EUR/USD came within striking distance of Friday’s lows, but a real test didn’t occur. Nevertheless, the yesterday’s price pattern only confirms that EUR/USD is still captured in a sell on-upticks price pattern. The pair closed the day at 1.2541 compared to 1.2517 on Friday.
Today, the calendar is moderately interesting. In Europe, the German May CPI data will be published. Inflation is not the main focus of markets today. However, a soft figure might make things easier for the ECB to make its U-turn on more policy stimulation. In the US, the consumer confidence and the CS house prices will be published. For the consumer confidence released we see the risks to the downside of consensus. In the current environment, the euro is again a very sensitive barometer for risk. So, we doubt that there is any upside for EUR/USD in case of a weaker than expected figure, on the contrary. The economic developments in the US are interesting, but the focus will remain on Europe. At least for now, we don’t have the impression that a solution of the EMU debt crisis is coming closer, on the contrary. Greece is no longer the only source of heightened event risk. The financial situation in Spain is also becoming a permanent source of event risk. In this context, we don’t see any room for a sustained comeback of the single currency. This morning in Asia, equities don’t perform that bad (speculation on more policy stimulation in China?). However, we doubt that these kinds of factors will be enough to stop the downward spiral of EUR/USD. This is also the case for the US eco data that will be published at the end of this week.