Spain remains the main focus and whether Madrid seeks for help from the EU – that would trigger ECB bond-buying - could determine the near-term fate of the shared-currency. In addition, Moody's has yet to announce its review of Spain's rating, which could see the country's credit cut to junk status, putting further pressure on bonds and mounting pressure on Rajoy to request aid.
Euro recovers but near-term fate could be determined by Spain
The shared-currency managed recover from a 3-week low about 1.2800, although the 1.2950 zone has capped the rise. From a wider view, EUR/USD seems to be going through a consolidation phase, having formed a double top at the 1.3170 zone on 9/14 and 9/17, and contained by 1.2800 on the downside.
Analysts remain split on the EUR/USD outlook. As eurozone worries persist, the euro could face additional pressure if a Spanish bailout request does not materialize soon, but EUR/USD slide could be limited by the Fed extremely loose policy. Moreover, the presidential elections and the fiscal cliff could hurt the USD.
According to Commerzbank analysts, investors will likely require more details on the rumors regarding a Spanish bailout, the ECB meeting on Thursday and the U.S. labor market report on Friday "in order to push EUR-USD out of its current range between 1.2800 and 1.2975".
In the same line, Wells Fargo analyst team notes that the US dollar has scope to slip further in the near-term after Fed Chairman Bernanke largely repeated the tone of the September FOMC statement yesterday, "although today's quiet data and event calendar may struggle to offer a catalyst for strong directional FX moves".
Meanwhile, the TD Securities team notes that even though a push above 1.2910 is constructive short term, "the EUR is not short of flaws, and in the medium to longer term we still think it should see lower levels".