Is EUR/USD Primed For Bounce?

Posted by: Sophia Rees / On: November 8, 2011 / No Comments »

Risk was better bid on the last trading day of the week as EZ credit markets settled down with the yield on the benchmark 10 year Italian bonds quoted well below the key 7% level. News that both Greece and Italy would get new governments instilled a measure of confidence in to the markets as traders speculated that both peripheral economies would now see more professional technocratic leadership at the helm.

Today the Italian senate is expected to pass the budget vote  that will assure the departure of Prime Minister Silvio Berlusconi and usher in the new government of former EU commissioner Mario Monti who is viewed as a competent technocrat that could better handle the country’s financial problems. Meanwhile the economic data in Spain showed that GDP in Q3 stalled at 0.0% but the news was expected by the market and players were more focused on the possibility of  a win by the centre right People’s Party which has promised to enact much needed labor reform registration which could spur growth and improve the country’s 21% unemployment rate. 

Thus, with investor panic beginning to recede ahead of the weekend, the tone in the currency market was decidedly more  constructive towards risk, as markets adopted a “no bad news is good news” view. However the rally in the EUR/USD stalled at the 1.3650 level after news that European officials spurned Chinese conditions for investing into the EFSF fund. The report tempered the rebound but the pair remained well bid at the 1.3600 level and if credit markets remain stable for the rest of the day while equities expand their rally the EUR/USD could resume its climb towards 1.3700 as the day progresses.

With stress in the capital markets starting to ease and sentiment towards the euro still decidedly bearish the pair is primed for a short squeeze if the market sees no more negative headlines today. With credit markets in North America closed for bank holiday, trading is likely to be more subdued, but one report that could help risk sentiment is the U  of M consumer confidence report due at 14:55 GMT. With US labor conditions improving the market expects consumer confidence to increase to 61.9 from 60.9 the period prior and if the data beats forecasts it could propel both equities and high beta FX higher as the week comes to a close.   

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