The pressure on the single currency continued in the beginning of this week versus the greenback as the fear of downgrading the credit rating of the EU countries has materialized by the end of last week by cutting the credit rating of 9 of the Euro area remembers by S&P giving all of the EU countries a negative outlook but Germany and Slovenia which has been cut by one notch like Slovakia, Malta, Austria and France which was having a triple A rating like Germany, Finland, Netherlander and Luxemburg who had been maintained with no change while Italy, Spain, Portugal and Cyrus have been cut by 2 notches as the credit rating downgrading risk was one of the elements which were weighing down on the single currency recently especially after S&P's warning on the 5th of last month by placing the credit ratings of 15 euro zone countries on negative credit watch.
The reactions of the EU Members were mixed. While Germany has decided to get use of this chance to praise the need of financial structure reforms placing the stricter budget rules soon which have been granted in the recent EU summit on the 9th of last month highlighting the need of activating the EU stability mechanism soon too.
but France has lowered the risk of this action which was expected while some other members like Austria has seen that its is not an understood or right action while the EU members are doing the best for solving the EU debt crisis which caused this downgrading by S&P which have seen these efforts are not enough as it has announced after the action.
The EU Economic and Monetary Affairs Commissioner Ryan has mentioned that this is an action from an agency has made mistakes before and this decision has been made with no right evaluation of the current efforts to stem off the budget deficit of the EU members.
But The EU Commissioner Janker has reacted to this action in an active way to the markets suggesting that this action can encourage the EU countries to increase the amount of the EFSF from its current amount at 500B euros which is worrying the markets as it is not sufficient to bail out countries like Italy which is in need to refund 341b Euros this year paying 54b as interest.
In this same time, the greenback is still getting strength by the improvement of the US economic which has been highlighted again by the end of last week by another better than expected release of Jan UN. Michigan consuming sentiment preliminary reading which has shown rising to 74 while the markets were waiting for just 71.5 after rising to 69.9 from 64.1 in November increasing the speculations of having no QE3 soon supporting the greenback which is taking advantage currently from another side by the falling of the risk apatite again on the increasing worries about the financial market after these downgrades.
God willing, the single currency can face now a new supporting at 1.2586 which has been the formed bottom on 24th of August 2010 and this can be followed by 1.2151 which is the last low before 1.1876 whereas the pair has rebound forming its bottom on 7th of June 2010 to 1.4939 whereas the pair has managed to ease back again on 4th of May 2011.
While the pair can face a resistance now at 1.2877 which could cap its gains after rebounding from 1.266 on series of successful EU bonds auctions last week specially the Spanish ones driving their yields down which were supported the ECB's recent efforts for lowering the cost of borrowing and providing cheap money in the forms of 3 years loans for the financial markets which praised these actions positive effects specially over the short term as they give time for the financial market lowering the pressure on it and on the single currency in the same time which has become exposed to the risk of failure recently while the EU economy is in need for the low cost money which can spur the investments in the same time and God's will, breaking 1.2877 can be met with another resisting level 1.2954 before the psychological level at 1.30 which can open the way for more resisting levels to come at 1.3098, 1.3283 and 1.3432 before 1.4385 again which contained the pair recent gains forming another lower high to put technical pressure on it.
Kind Regards
FX Market Strategist
Walid Salah El Din
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