EUR/USD – Cyprus Worries Continue to Weigh on Markets

Euro/dollar remains steady in Tuesday trading, as the markets nervously monitor developments in Cyprus. On the weekend, the European Union, International Monetary Fund and Cypriot government announced that they had reached an agreement whereby Cyprus would receive a bailout package worth EUR10 billion.  However, the bailout included a provision of a one-time tax on bank deposits, which has understandably caused an uproar in Cyprus. The Cypriot government is trying to amend the bank levy in order to win parliament’s approval of the bailout. In economic news, Italian Industrial Production hit a five-month high. German ZEW Economic Sentiment was excellent, hitting its highest level since 2010. However, Eurozone ZEW Economic Sentiment was way below the estimate. In the US, there are only two releases on Tuesday, both being important housing indicators – Building Permits and Housing Starts.

What was supposed to be a relatively small bailout for a struggling Eurozone member has sent the markets spinning. Over the weekend, a bailout agreement was reached over the weekend between the EU, IMF and the Cypriot government in the amount of 10 billion euros. However, a controversial provision in the agreement has threatened to derail the bailout. Under the terms of the bailout package, deposit holders in Cypriot banks would be levied with a one-time tax, between 6.7% and 9.9%, depending on the size of the deposit. This tax is intended to raise 5.8 billion euros, covering more than half of the 10 billion euro bailout. Taxing bank deposit holders is an unusual step, and the markets fear that it could result in depositors in other Eurozone countries with high debts transferring their funds to countries such as Germany. Cypriots were understandably fuming, as this marked the first time in the Eurozone debt crisis that bank depositors were being asked to take a haircut as part of a bailout. The Cypriot parliament was scheduled to meet in an emergency session on Tuesday to vote on the bank deposit levy and the bailout, but the drama continues, as the vote has been postponed.

The political crisis which has paralyzed Italy for several weeks shows no signs of a breakthrough. Even by Italian standards, the political puzzle is bewildering, and the only way out may mean yet another election. Most Italians oppose going back to the polls, but so far, the political leaders have not made any headway as far as forming a new government. Italian President Giorgio Napolitano has asked Prime Minister Mario Monti to stay on until the political crisis is resolved. The financial markets are increasingly concerned that the political impasse could lead to an economic crisis in the Eurozone’s third largest economy. Underscoring this fear, Italy’s three-year borrowing costs rose to their highest level since December in an auction last week. This follows a recent credit downgrade to Italy’s debt by the Fitch rating agency. If Italy doesn’t get its act together and form a government quickly, we could see negative ramifications spread from Italy to the Eurozone. 

In the US, the Federal Reserve meets for a policy meeting on Wednesday. The markets are watching to see if the Fed continues the current round of QE. With the US recovery looking stronger and unemployment nudging lower, there has been speculation that the Fed might wind down or modify its asset purchasing program. However, Fed head Bernard Bernanke and other senior officials have insisted that QE will continue. If the Fed surprises the markets, we can expect some volatility from EUR/USD.

 

EUR/USD for Tuesday, March 19, 2013

Forex Rate Graph 21/1/13
EUR/USD March 19 at 10:00 GMT

1.2933 H: 1.2970 L: 1.2917

 

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.2757 1.2802 1.2882 1.2950 1.3000 1.3080

 

EUR/USD is steady, and was trading in the 1.2930 range in Tuesday’s European session. The pair  is facing resistance at 1.2950. This line was breached earlier, and could face more activity. There is stronger resistance at the round number of 1.30. On the downside, 1.2882 is providing support. The next support level is at 1.2802.

Current range: 1.2882 to 1.2950

Further levels in both directions:

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

 

OANDA’s Open Position Ratios

The EUR/USD ratio has shifted directions from Monday, and is now pointing at movement towards short positions. The pair is currently not showing much movement in either direction. If the ratio continues with this activity, we could see the dollar break out and post gains at the expense of the euro.

The euro began the week with sharp losses, thanks to the crisis over the Cyprus bailout. EUR/USD has now steadied, but the Cyprus situation has not been resolved yet, and continues to weigh on the euro. With the US releasing major housing data later on Tuesday, we could see some volatility from the pair.

 

EUR/USD Fundamentals

  • 9:00 Italian Industrial Production. Estimate 0.3%. Actual 0.8%
  • 10:00 German ZEW Economic Sentiment. Estimate 47.9 points. Actual 48.5 points
  • 10:00 Eurozone ZEW Economic Sentiment. Estimate 43.7 points. Actual 33.4 points
  • 12:30 US Building Permits. Estimate 0.93M
  • 12:30 US Housing Starts. Estimate 0.92M

 

*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.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.