Forex Flash: EUR/USD main upside risk is Spanish stubborness tomorrow - Commerzbank

FXstreet.com (Barcelona) - The euro optimists jumped for joy after Moody's confirmed the Spanish rating still at Baa3, instead of downgrading to junk, boosting expectations of ECB bond buying through the OMT programme. And there the EUR/USD went, up to 1.3125 high. However, Commezbank analysts see a contradiction here: Moody's rating eased pressure on the Spanish government to accept aid conditions, which pushes the OMT programme away and keeps the Eurozone and the market from experiencing the “turning point for the euro”. Many market participants may consider the implied threat of a downgrade as sufficient to convince Spain to apply for aid at the EU summit starting tomorrow, negotiations about a precautionary credit line for Spain in the last few weeks “were already tough and drawn out when the sword of Damocles of a downgrade was already hanging over the Spanish rating and market pressure was still much higher”, wrote analyst Carolin Hecht, also questioning Moody's second core issue to confirm the rating, as Spain is still lagging behind considerably when it comes to meeting the savings targets. “That means the risk of a downgrade is far from banished”, Hecht added.

“Short term the main risk for the up move in EUR-USD is that Spain might turn out to be more stubborn tomorrow than many market participants seem to be expecting at present”, wrote the Commerzbank analyst, considering the lower end in EUR-USD to be the more vulnerable one, with downside targets at 1.3000 and 1.2965.

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