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A firmer tone for the EUR (and risk) at the start of a new week

Publication date: 28 May 2012
Author: Andrew Timothy Robinson, Saxo Bank

The EUR has started this week with a mild rush higher as weekend Greek opinion polls suggested that the pro-bailout New Democracy Party in Greece is making positive headway against Syriza and is now a few percentage points ahead. In Asia, EURUSD opened 30-40 points higher than its NY close and continued to slowly push higher during the session.

Latest IMM data published at the weekend showed that net EUR shorts have been increased again to new record levels as per last Tuesday, while net long USD exposure increased to its highest level since mid-2008. However, technical analysts note that the firmer tone today has resulted in some bullish momentum divergence on the daily charts.

EURUSD Daily May 28
Bullish momentum divergence confirmed on RSI and pending on Stochastics this maybe suggests some caution for EUR bears.

An article in the UK Times also suggested that a plan is being drawn up for a European rescue fund that would be allowed to take control of problem banks via debt mutualisation. Meanwhile, after Friday’s close, Spain’s Bankia revealed the extent to its financing needs with a €19 bln aid request to the government with the authorities reportedly mulling recapitalising the bank with government bonds.

After Friday’s slightly encouraging Japanese inflation data, the corporate service price index for April also indicated slightly firmer prices. The service price index was 0.2 percent higher than a year ago, the first positive reading since September 2008.

In a new report, the CBI offers some good news for the UK economy. Its latest quarterly report shows confidence amongst British services groups rose to its highest mark in 12-months in May with projections for improved business conditions over the next 3-months. Consumer service firms (hotels, restaurants, travel agents) experienced a dramatic rise in future expectations (up to +21 versus -21 in February).

There was more volatility for the EUR in Friday’s overnight session but the single currency eventually finished the week on a sour note. We saw an early rebound higher as some players booked profits ahead of the long US weekend but that proved short-lived and stalled just above 1.26 versus the US dollar. News that Spanish region Catalonia was running out of debt financing options and needed central government help and uncertainty surrounding Spanish bank Bankia was enough to tip the scales back lower. Add to this an S&P downgrade to 5 Spanish banks and the EURUSD closed just above 1.25.

Friday’s US session was almost clear of data apart from the Michigan confidence revision. The index was revised higher to 79.3 from 77.8 and this was enough to pull the USD up to its highest weekly close of 2012. Yet Wall St finished the week with a whimper with the DJIA losing 0.6 percent, S&P -0.22 percent and the Nasdaq -0.07 percent but all still managing a positive week, the first in four.