In the wake of the downgrade, the sense seems to be that the Spanish government should be pushed to request for aid sooner rather than later, triggering the ECB bond-buying program, however, PM Rajoy seems to have no rush to do so, especially as Spanish yields remain constrained.
In the US, initial claims for unemployment benefits fell to their lowest in four and a half years, fueling optimism across markets and putting further pressure on the safe-haven currencies, like the USD and the JPY, that are among the worst performers.
Euro recovers from lows, 1.3000 in sight
EUR/USD fell to the 1.2825 area (the 200-day MA) after the downgrade of Spain, but as the tone has turned more upbeat on continued hopes that Spain will request financial assistance, EUR/USD managed to regained losses and even made a new high of 1.2947. It was last at the 1.2940 zone, up 0.5% on the day.
From a technical view, short-term indicators are pointing for a stronger recovery, and a break above 1.2950 could pave the way for a rally to the 1.3070 zone (Oct 5 high). On a wider view however, EUR/USD continues to trade in familiar ranges as many investor stay on the sidelines amid lingering uncertainty on both sides of the Atlantic. While Europe struggles with its debt crisis, the US deals with the upcoming elections and the fiscal policy path.
"Overall, we don't see any of today's foreign exchange moves as being supported by decisive headlines or concrete developments", says the Wells Fargo team. "Rather, currencies continue to move back and forward on swings in market sentiment. While positive mood and foreign currency gains may persist for today, we are hesitant to call for a directional trend, and continue to see choppy and sideways trading in the coming days".
According to Rabobank analysts, over the course of the coming weeks there are a number of events that could lead to more market tensions in Spain including regional elections in Catalonia and Galicia, the likelihood of more sour economic data and an impending ratings review from Moody's which could potentially judge Spain to be in junk territory. "These events have the capacity to push Rajoy into requesting a bail-out which no doubt would come as a relief to investors worldwide", says Rabobank team. "We continue to pencil in pullbacks for EUR/USD on a 1 mth view, but medium-term we are forecasting a move to USD1.35. Near-term 200 day sma will act as support at EUR/USD 1.2823".