EUR/USD shrugs off Catalan election, early week bounce possible

Markets are fairly quiet early in this week’s trade, belying a fairly interesting week when it comes to economic data. Beyond the continued political fallout from the surprise recognition of US Speaker of the House John Boehner, traders are also digesting the historic weekend election in the Catalonia region of Spain.

After the central government in Madrid blocked a referendum on Catalonian independence earlier this year, this election was seen as a vote for secession from Spain. The pro-separatists have seemingly been given a mandate to pursue their goal, securing an absolute majority of 72 (of 135) seats in government on the back of a staggering 77.4% voter turnout. The participation in the election was so unexpectedly massive that voting locations actually ran out of ballots. It’s worth noting, however, that pro-independence parties only took about 48% of the popular vote.

While the vote clearly increases political risks for Spain, and by extension the euro, we’d caution readers against taking too dour of a view yet. As we learned with the Scottish Independence Referendum, it’s relatively easy to vote for a big change in principle, but when it comes to a binding decision for a dramatic change to the status quo, voters tend to grow more conservative.

Technical View: EUR/USD

Euro traders have seemingly taken the sanguine outlook toward the election, with EUR/USD only edging lower by about 20 pips so far. As we discovered last week, there is critical support at the 1.1100 level that should provide some measure of confidence to the bulls as long as it holds.

Taking a broader perspective, there are some technical reasons for optimism on the EUR/USD chart. Over the last several weeks, the pair has formed a positive reversal with its 14-period RSI. That is, the exchange rate made a higher low while the indicator made a lower low. This bullish development shows that EUR/USD was actually more oversold at a higher price last week, suggests we could see a bounce from here. In addition, the 50-day MA is about to cross back above the 200-day MA, forming a so-called “golden cross” that many analysts see as a sign that the long-term trend may be shifting to the topside.

As long as the political disruption from Catalonia remains subdued, EUR/USD may bounce back toward the 1.13-1.14 zone in the next couple days. However, as we head into the latter half of the week, attention will shift back to the US and the highly-anticipated Non-Farm Payroll report out of the world’s largest economy. That said, if the 1.1100 floor is conclusively broken, EUR/USD could drop down to the multi-month bullish trend line around 1.10.