A combination of Trichet’s comments, political woes, and an Italian bond auction has all combined to create selling pressure on the EUR. On the charts an evening star pattern is beginning to take shape. Therefore, today’s closing price should be closely followed.
Yesterday ECB President Jean-Claude Trichet told the European Parliament that inflation risks for the medium-term are “under study” prior to the ECB’s next meeting on September 8th. The comments come on the heels of yesterday’s decline of -0.1% in August CPI for Germany could make market participants think twice about the ECBs next rate hike. Expectations have been built in for the ECB’s third 25 bp increase in this year with most rate strategists eyeing Q4 after Mario Draghi takes over the helm of the ECB to secure his inflation fighting credentials. The August inflation data may derail those plans and reduce markets’ expectations for an additional rate increase this year.
Today’s Italian 10-year bond auction was weaker than usual with the bid to cover ratio down at 1.27 from 1.38 despite The ECB continues to buy Italian and Spanish debt, albeit in smaller amounts. This has supported the BTP market which could be trading with a yield near 6% if it were not for the ECB holding together the ship. We may expect further deficit cutting measures by Italy given the recent demands made by the ECB.
The collateral demands by Finland continue to hold up the approval of the July 21st agreement for additional Greek aid. Finnish Prime Minister Jyrki Katainen said, “the collateral agreement needs to be solved as soon as possible so Finland’s aims will not hurt other countries.” The comments were made in the newspaper Helsingin Sanomat. German Chancellor Angela Merkel continues to oppose any side pact made outside the realm of the July 21st agreement. Additional demands on Greece could further threaten Greece’s ability to address its fiscal problems.
Given the headwinds the EUR faces the EUR/USD has been unable to maintain a bid above 1.45 for the past 11-weeks. Today the EUR/USD was pushed as low as 1.4385 before recovering to 1.4420. Should today’s candle close near this level we could have an evening star pattern, a bearish sign. Support comes in at the Thursday/Friday low of 1.4325 followed by the rising trend line off of the July low at 1.4260. Resistance is located at Friday’s high of 1.4550.
Read more forex trading news on our forex blog.
