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Sunday, 7 August 2011

EURO: Targeting the Highs?

The Euro has been under pressure, as the Italian and Spanish debts have been hammered by the speculation. Technically, the uptrend of the currency remains intact, but an important resistance must be overcome for higher levels.

EURO/USD: Breakout or Failure?
The European markets are again under pressure, as the honeymoon following the Brussels summit of last July has already come to an end.  After Greece and Portugal, the sovereign debt of Italy and Spain has been hammered by the speculation. The yield spread of the two countries reached levels not seen since the creation of the EMU and investors fear the worst might not be over. There is room for help, but the European Central Bank expects both countries to implement draconic measures to face the debt.  Nobody wants to put money on the table without setting the rules first. Nonetheless, waiting too long before intervening might be costly for the euro.  In reality, the chart of Euro/Usd tells a different story. The potentiality for an increase of prices is still intact. The Euro might test again the high at 1.45, if it clears 1.4380.  Then, a move above 1.4650 is essential to target 1.48, eventually 1.50. A decline below 1.3720 would instead trigger selling orders and eventually start a bear market that could last from 6 months to 1 year. The objective could be 1.36, 1.33.

If Europe is bad, U.S. is now worst?
For the first time in history, Standard & Poor’s cut the credit rating of the U.S. to AA+ from the triple “A”. The agency does not believe the decisions taken in July by the Congress will be enough to reduce the large deficit. In effect, the Budget Control Act is history, but there are wounds that need to be healed. The toughest decisions (the fiscal reforms as an example) have been postponed for better times to come, while the political battle might have damaged more the Democrats than the Republicans. A price could be paid during the coming elections, if the economy will be again trend lower. However, on Tuesday, the Fed should keep rates unchanged. A decision could be postponed to the end of the year, or the beginning of the next, when the picture on inflationary trends will be clearer. In the mean time, the U.S. economy has moved sideways for the first part of 2011. The Purchasing Managers Index fell to 50.9 in July from 55.3, the lowest mark since July 2009. It is not the end of the world, of course, but negativity in the financial markets could be reflected in consumer confidence and economic growth. That would be a different story.

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