EURUSD – coming into the eye of the storm?

EURUSD – coming into the eye of the storm?

Risk aversion was evident for all to see overnight, with the euro falling heavily relative to the USD, CHF and JPY. We continue to advocate selling rallies although with EUR/USD at the bottom of its recent range, and we may see sovereign funds stepping in and supporting below 1.41. Support on the pair can be found at 1.4055 (the August 5 low), while the 200-day moving average at 1.4016 comes in two pips above the July 17 low. So, from current levels, we will need to see a further deterioration in European issues to view a sustained break below 1.40. Sentiment is shocking at present, and while it feels like we are in the eye of the storm, there are signs that perhaps this is only just started. Europe last night showed that on a composite level, manufacturing PMI’s are in contractionary territory for the first time since 2009. This must now affect the ECB’s future policy response, and perhaps we could hear of a more neutral stance from the ECB in its September meeting. Italian yields are under huge pressure and have moved higher eleven days in a row, and are worryingly 368 basis points above German bunds. There is concern that Italy will not meet their official growth forecasts of 1.1% this year and could also be downgraded by Moody’s. The country’s President Mr Napolitano said that the alarming widening of Italian sovereign spreads over bunds cannot be ignored, and said it shows the urgent need to regain market confidence. Greek two-year yields pushed up to 50% overnight on the premise that the country may struggle to get its next tranche of aid. Given German Chancellor Merkel’s disastrous ratings over the weekend in the polls, it is clear the public has vented its full anger at the politician responsible for handing over its taxes to Greece, Portugal and Ireland. Tonight sees European GDP (expected to gain 1.7% year-on-year) and German factory orders, while the US services ISM could see further downside in risk assets if lower than expected.

ENDS

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