EUR/USD Forecast Dec. 21, 2011, Fundamental Analysis

The EUR/USDmoved to the upside on Tuesday and recovered on the back of hope that some progress is being made with high focus on the ECB auction this week, its first of the announce twin three year auctions.

Markets turned higher with stronger than expected German confidence and a very strong Spanish bond sale. Spanish short term borrowing costs dropped heavily allowing the nation to exceed its upper limit selling 3.7 billion of 3-month bills at an average yield of 1.7% from 5.11% the previous auction and sold 1.92 billion of 6-month bills at an average yield of 2.4% from 5.2%.

We saw a very positive reaction for the auction despite the fact that many downplayed the move as banks pilled the bonds to benefit from the ECB facilities and gear for the three-year loans to be auctioned on Wednesday.

Holiday volatility is clearing more by day and on Wednesday we expect more volatility with the lack of heavy data as the eyes will be centered on demand for the three-year loans at the ECB window as they announce the total bids and allotted amounts which is key for the markets and a very large number might as well be shocking and could send a jitter wave that the banking sector is indeed stressed, yet already expectations are for demand to be high that might reach as much as 300-400 billion euros.

At 15:00 GMT the US Existing Home Sales for November are due and expected with 2.2% rise to 5.06 million from 4.97 million.

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