EUR/USD – Tumbles after Cyprus Bailout Package Agreement

The euro had a rough start to the new trading week, following the announcement of a EUR10 billion euro bailout for Cyprus, a member of the Eurozone. The markets reacted negatively to the news that the rescue package included a one-time tax on deposits in Cyprus banks. The euro plunged on the news, and shed around two cents against the US dollar. EUR/USD has recovered some of these losses in European session, and was trading in the mid-1.29 range. The US posted some strong figures last week, but the week ended on a sour note, as manufacturing and consumer confidence numbers fell well below expectations. There are just three releases out of Europe and the US as we start the new trading week. Italy posted a Trade Deficit for the first time since October 2012, disappointing the markets. In the Eurozone, the Trade Surplus narrowed, and fell well short of the estimate.

The euro took a hit after the announcement of the Cyprus bailout. The agreement was reached over the weekend between the EU, IMF and the Cypriot government. The bailout includes an unusual provision of a one-time tax on bank deposits, which is expected to raise 5.8 billion euros, covering more than half of the 10 billion euro bailout. Although Cyprus does not boast a large economy, there was concern that if the country went into bankruptcy, the contagion could affect the entire Eurozone and reignite the debt crisis. In return for the bailout, Cyprus has agreed to trim its deficit, consolidate its banking sector and raise taxes. The markets reacted negatively to the announcement, reflecting a fear that the tax on deposits could lead to bank runs in other Eurozone countries struggling with high debts, further destabilizing the zone.

There is little worry about bank runs in the US, but the health of the economy and pace of recovery continues to weigh on the markets. After excellent US employment and retail sales numbers earlier in the week, Friday’s releases were a big disappointment. The well-respected UoM Consumer Sentiment dropped to 71.8 points, well off the estimate of 78.2 points. The Empire State Manufacturing Index also lost ground, falling to 9.2 points, and missed the estimate of 9.8 points. There was some positive news, as Industrial Production was higher, rising 0.7%. This beat the estimate of 0.4%. The markets will be keeping a close eye on this week’s Federal Reserve policy meeting, which is often a market-mover and could affect the direction of EUR/USD.

The political impasse which has paralyzed Italy for several weeks continues. Even by Italian standards, the political crisis is bewildering, and the only way out may mean another election. Most Italians oppose going back to the polls, but so far, the political leaders have made little progress in coalition talks. The financial markets are increasingly concerned that the ongoing political impasse will lead to economic instability. Last week, Italy’s three-year borrowing costs rose to their highest level since December. This comes on the heels of a recent credit downgrade to Italy’s debt by the Fitch rating agency. Italy is struggling with a massive debt of 1.9 trillion euros, high unemployment and weak growth. We could see the economy continue to weaken if the politicians don’t get their act together and quickly put together a government to start dealing with the country’s pressing economic troubles.

EUR/USD for Monday, March 18, 2013

1.2954 H: 1.2976 L: 1.2889

EUR/USD Technical

EUR/USD showed unusual volatility in Monday’s Asian session, plunging around two cents, as it dipped below the 1.29 line. The pair has recovered some of these losses in European trading, and has climbed back to the mid-1.29 range. There is support at 1.2950. This line is weak, and given the pair’s volatility, could see more activity today. The next support level is at 1.2882. On the upside, the round number of 1.3000 is providing resistance. This is followed by a resistance line at 1.3080.

Current range: 1.2950 to 1.3080

Further levels in both directions:

• Below: 1.2950, 1.2882, 1.2802, 1.2757 and 1.2683
• Above: 1.3000, 1.3080, 1.3130, 1.3170 and 1.3280

OANDA’s Open Position Ratios

As we start the new trading week, EUR/USD ratio is pointing to strong movement in favor of long positions. This is in line with the pair’s movement in the European session, as the euro is pushing upwards following sharp losses in Asian trading. If the euro can continue the upward momentum, we can expect the activity in the ratio to continue.

EUR/USD has certainly kept traders busy in Monday trading, showing stong volatility as we begin the new trading week. We could see more movement during the day, as the pair tries to find its footing.

EUR/USD Fundamentals

• 9:00 Italian Trade Balance. Estimate 2.11B. Actual -1.62B
• 10:00 Eurozone Trade Balance. Estimate 10.4B. Actual 9.0B
• 14:00 US NAHB Housing Market Index. Estimate 48 points

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.