By: Christopher Lewis
EUR/USD fell for the bulk of the Friday session amidst rumors of a potential French downgrade by S&P. The downgrade did in fact happen, but it was only after the bulk of traders went home for the weekend after 4 pm New York time.
The EU saw 9 members downgraded, and all but Germany put on “negative watch” by the agency. The borrowing costs of the Spanish and Italians will be especially interesting to watch as they were both hit hard by the agency, losing two notches. The markets will certainly have something to say about this move on Monday, and while there were rumors on Friday, today will be the first chance for Asians and Europeans to react with the full knowledge of the damage.
One of the most important gauges of Euro strength lately has been the Italian 10 year bond auctions, and now that this has happened, it is very likely that the Italian and Spanish bond markets will continue to be very important to Forex traders worldwide. Once those markets open back up, it will be very telling on how they act. After all, the Italians are being helped quite a bit by the European Central Bank buying their paper. If it weren’t for the ECB, nobody is really that sure they would be able to sell bonds.
Technical Outlook
To say this pair is in a downtrend is a bit of an understatement. Because of this, I only see this pair. The market will of course bounce, and the 1.26 level could be a place to see that. Honestly, the open in Asia will probably set the tone for the next couple of days. The 1.26 is vital, and below that there isn’t much support until we get to at least 1.20, and more than likely 1.19 or so.
.jpg "EUR/USD Daily 1/16/12")
The candle formed for Friday is a bearish engulfing one, and it shows a massive reversal. The attempted rally was defeated, much like all the others lately. Quite frankly, anytime this pair rises it is simply an invitation to sell again at higher prices. This is exactly what I am doing – selling rallies. A daily close below 1.26 has me holding onto a short position until 1.20 or so.