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EUR/USD – Cyprus Crisis Continues to Weigh on Markets

EUR/USD remains under pressure in Tuesday trading, as the Cyprus bailout crisis continues to be the number one topic in financial headlines. The Cypriot parliament met in an emergency session on Tuesday and voted to reject the controversial bailout package. In economic news, German ZEW Economic Sentiment was excellent, but the Eurozone ZEW Economic Sentiment took a dive. In the US, Building Permits posted its best performance since 2008 and Housing Starts stayed within expectations. Looking at Wednesday’s events, German PPI declined, while Eurozone Current Account posted a wider surplus. In the US, the Federal Reserve will conclude a two-day policy and release a Monetary Policy Statement. In Wednesday’s European session, EUR/USD has climbed above the 1.29 line.

The epicenter of this week’s financial news is, of all places, Cyprus. One of the smallest members of the Eurozone, the island country is struggling, and thought it had concluded a bailout agreement (worth 10 billion euros) over the weekend with the EU and the IMF. However, a controversial provision in the agreement has enraged Cypriots and sent the currency markets spinning. 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, which would be a condition to receiving the 10 billion euro bailout.  There was a run on bank machines, as Cypriot banks were closed for a holiday. Taxing bank deposits is unusual, and there is a fear that other debt-ridden countries, such as Spain, could face bank runs as well. The drama continued on Tuesday, as the Cypriot parliament voted overwhelmingly against the bailout deal, despite the government’s pleas that rejecting the agreement could lead to a bank collapse. In an attempt to contain the fallout, Eurozone finance ministers are likely to meet today to discuss options following the vote in parliament.

The political deadlock which has paralyzed Italy for several weeks shows no sign of a breakthrough. Even by Italian standards, the political vacuum is bewildering, and the only solution 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 subsides. The financial markets are increasingly concerned about the health of the economy. Unemployment is high, borrowing costs are rising, and the country is staggering under a massive debt of two trillion euros. There is increasing concern that a prolonged political vacuum will lead to a full-blown economic crisis in the Eurozone’s third largest economy.

Overshadowed by the crisis over the Cyprus bailout, the US Federal Reserve wraps up a policy meeting on Wednesday. The Fed is expected to maintain ultra-low interest rates, but the markets will be anxiously awaiting what the Fed decides to do regarding the current round of QE. With the US recovery looking stronger and unemployment dipping lower, there has been speculation that the Federal Reserve might wind down or modify its asset purchase program. However, Fed head Bernard Bernanke and other senior officials have said the current round of QE will continue until the US recovery deepens. If the Fed surprises the markets, we can expect some volatility from EUR/USD.

 

EUR/USD for Wednesday, March 20, 2013

Forex Rate Graph 21/1/13
EUR/USD  at 11:00 GMT

1.2919 H: 1.2936 L: 1.2844

 

EUR/USD Technical

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

 

EUR/USD has moved higher, and crossed above the 1.29 line in Wednesday’s Asian session. The proximate resistance and support levels remain in place (S1 and R1 above). The pair is facing resistance at 1.2950. This is a weak line, and could be tested if the euro continues to move higher. There is stronger resistance at the round number of 1.3000. On the downside, the pair is receiving support at 1.2882. The next support level is at 1.2802.

Current range: 1.2882 to 1.2950

Further levels in both directions:

 

OANDA’s Open Position Ratios

The EUR/USD ratio continues to shift directions this week, and is pointing at movement towards long positions. This is consistent with what we are seeing from the pair, as the euro has edged higher against the US currency. Trader sentiment continues to be split, with the ratio close to an even split between long and short open positions.

The crisis in Cyprus continues to weigh on the euro, which dipped below the 1.29 level, but has since recovered. The US Federal Reserve will issue a Monetary Policy Statement later today, and this could affect the movement of EUR/USD.

 

EUR/USD Fundamentals

 

*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 [4]

Currency Analyst at Market Pulse [5]
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.