The euro weakened as European concerns linger ahead of a meeting of eurozone finance ministers in Luxembourg later today. Spain is expected to top the agenda as uncertainty continues about whether and when the country requests an official bailout.
Euro fails to regain 1.3100 and turns south, where to now?
The euro failed to extend last week's rally above 1.3070 as the boost from U.S. nonfarm payrolls faded. Instead, EUR/USD turned lower and fell to a 4-day low of 1.2936 during the European session. It was last down 0.4% at the 1.2970 area.
The technical picture remains short-term bearish for EUR/USD, although with the pair correcting from oversold readings a consolidation phase could precede another leg lower, with 1.2800 in sight. On the other hand, in the bullish scenario, a break above 1.3100 should open the doors for a retest of September's double-top at 1.3172.
EUR/USD rejection from highs evidences that investors remain focus on the eurozone woes, with Spain in the eye of the storm for the time being. However, the EUR/USD outlook is not that clear as the dollar faces its own hurdles. With the presidential elections looming and the fiscal cliff unaddressed, the USD could depreciate especially given the Fed's aggressive stimulus plan.
Structural issues persist on both sides of the Atlantic, leaving analysts split on the future of the EUR/USD and investors focusing in day-to-day developments.
For the upcoming week, markets will be watching the headlines from the European finance ministers' meeting followed by the G7 finance ministers' meeting later this week. "Acknowledging the risk that European politicians may struggle to offer much clarity on the Greek and Spanish uncertainties, we hold a mild bias for a weaker US dollar over the coming week", says Wells Fargo team.
Gareth Berry, analyst at UBS, notes that the latest data-flow is dollar-supportive. "The latest US economic data releases paint a more constructive picture of the US recovery. The ISM surveys firmed and the US unemployment rate declined suddenly in September", he says. "The contrast with the state of play inside the Eurozone is growing increasingly stark, and whatever path the sovereign debt crisis takes next, the trans-Atlantic divergence in data flow is justification enough to expect EURUSD to trade heavy over time. We look for further dollar strength ahead".
Even though UBS team expects an eventual resumption of the downtrend in EUR/USD, it warns about the possibility of another leg higher. "A possible Spanish aid request and eventual activation of the OMT by the ECB could give the euro one last push higher".
Meanwhile, Jane Foley, Senior Currency Strategist at Rabobank, continues to view potential risks for the EUR to fall to the 1.2600 region in the upcoming weeks. "Medium-term, however, we expect an improvement in risk appetite and coincident USD weakness to allow EUR/USD to push towards 1.35 on a 12 mth view".